Cases by Issue - Gas Pipeline Regulationhttp://www.oyez.org/taxonomy/term/8407/podcast
U.S. Supreme Court Oral Arguments, presented by The Oyez Project (www.oyez.org)enSkinner v. Mid-America Pipeline Co. - Oral Argumenthttp://www.oyez.org/cases/1980-1989/1988/1988_87_2098/argument
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Case:&nbsp;</div>
<a href="/cases/1980-1989/1988/1988_87_2098">Skinner v. Mid-America Pipeline Co.</a> </div>
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Transcript:&nbsp;</div>
<p>ORAL ARGUMENT OF THOMAS W. MERRILL ON BEHALF OF THE APPELLANT</p>
<!-- William_H_Rehnquist--><p><b>Chief Justice William H. Rehnquist</b>: We'll hear argument next in No. 87-2098, Samuel Skinner v. the Mic-America Pipeline Company.</p>
<p>Mr. Merrill?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Thank you, Mr. Chief Justice, and may it please the Court.</p>
<p>This case concerns the constitutionality of a system of fees established by Congress in Section 7005 of the Consolidated Omnibus Budget Reconciliation Act of 1986.</p>
<p>The District Court for the Northern District of Oklahoma, adopting the report of a magistrate, held that the statute is an unconstitutional delegation of Congress' power of taxation.</p>
<p>The case is here on a direct appeal from that judgment.</p>
<p>The Appellee does not argue in its brief that Section 7005 violates the general non-delegation principles articulated... articulated by this Court in its decisions beginning with J. W. Hampton and Company v. United States and most recently in Mistretta v. United States.</p>
<p>Instead, Appellee argues that... that the case does not come within the terms of the ordinary delegation doctrine for two reasons.</p>
<p>First, Appellee contends that the power of taxation is subject to a special and highly restrictive version of the non-delegation principle.</p>
<p>And second, Appellee contends that the fees that were imposed by Section 7005 cannot be sustained as an exercise of any power of Congress except its power of taxation.</p>
<p>I'd like to turn to those two arguments in a moment, but first I think it would be useful to spend a little time looking at the... the provisions of the statute that is at issue here, Section 7005, because when we do that, I think you'll see that Congress has, in fact, given the executive very little discretion in this particular statute.</p>
<p>In fact, Congress itself made most of the crucial policy decisions implicated by this particular system of fees.</p>
<p>Congress provided in the statute quite clearly that it was to apply to only one agency, the Department of Transportation.</p>
<p>This is not an omnibus bill that applies to... across the board to all Federal agencies.</p>
<p>Congress articulated quite clearly its policy.</p>
<p>It wanted a system of fees established that would recover the costs that the Department of Transportation incurs in implementing two pipeline safety programs, the Natural Gas Pipeline Safety Act and the Hazardous Liquids Pipeline Safety Act.</p>
<p>Subsection D of Section 7005 imposes a precise ceiling on the total amount of fees that can be collected in any given year.</p>
<p>It cannot exceed 105 percent of the annual appropriations established by Congress for both of these pipeline programs.</p>
<p>In Subsection C of the statute, Congress adopts another limitation providing that the fees can be used only for one purpose.</p>
<p>They can only be used to support the agency's activities under these two pipeline programs and not for any other purpose.</p>
<p>Subsection A(3) and Subsection D of the Act both specify exactly who is to pay these fees.</p>
<p>They are to be paid by all natural gas pipeline transmission companies and by all liquid... hazardous liquid pipeline companies.</p>
<p>And finally, the only area of the statute that really provides for any degree of discretion at all is the section that sets forth how the fees are to be established, and that's Subsection A(1) of Section 7005.</p>
<p>And if we look at that section carefully, you will see that Congress, in fact, adopted no less than four constraints on the exercise of discretion by the Department of Transportation in setting the fee schedule.</p>
<p>First of all, if the statute is read carefully, you will see that it adopts a single principle that the Department of Transportation is to follow in establishing fees.</p>
<p>Fees are to be based on pipeline usage.</p>
<p>Secondly--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Mr. Merrill, you keeping referring the... to these charges as fees.</p>
<p>I guess one of the things argued by the other side is that it's a tax not a fee.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --That's correct, Your Honor.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: And I must say there is language in National Cable Television and other cases that would indicate that fees are imposed on identifiable beneficiaries for particular benefits.</p>
<p>And this looks very much like a tax.</p>
<p>I guess your argument doesn't require us to determine that it's a fee and not a tax, but--</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Well, as I... I mentioned--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --I find it difficult to look at this as anything but a tax.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --As I mentioned very briefly, the Appellees really have to sustain two propositions in order to win here, and if they don't sustain on... sustain both propositions, they lose.</p>
<p>The first is that Congress is subject to some special restriction on delegation under the taxing power, and the second is that this system of fees could only be justified as an exercise of the taxing power and not as an exercise of the commerce power.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, you refer... you continue to refer to it as a system of fees.</p>
<p>But traditionally fees have been imposed on people who get some benefit from... the user fee.</p>
<p>You know, you go to a national park.</p>
<p>You camp overnight.</p>
<p>You get something out of it.</p>
<p>Here these people aren't asking for safety controls.</p>
<p>They're subject to the safety controls.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: That's true, Your Honor.</p>
<p>Recall, however, the Constitution doesn't use the word "fees" and we're talking about an issue of constitutional law.</p>
<p>The issue of... the second issue of constitutional law presented we think is whether or not Congress had to be acting under the taxing power or whether it could be acting some... under some other power such as the commerce power.</p>
<p>Now, it's true that the word "fee" traditionally has a connotation of something like a user fee or some exaction in return for a benefit.</p>
<p>That's what the independent Offices Appropriations Act is about, and that's what this Court had before it in the National Cable Television case and in the New England Power case.</p>
<p>But if you think about the Commerce Clause and what Congress can do under the Commerce Clause, I don't think it be... can be contended that the only thing Congress can enact is a fee in that technical sense of... of some charge imposed in return for a benefit.</p>
<p>Congress passes statutes containing civil penalties, criminal fines.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Can it enact a tax under the Commerce Clause?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: I don't think that Congress could enact a... a pure tax under the Commerce Clause.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Why would it ever need to?</p>
<p>I mean, if it's enacting a tax, why doesn't it proceed under the power to levy taxes?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: The truth is I think, Justice Rehnquist, that Congress doesn't specify what clause of the Constitution it's proceeding under when it adopts these sorts of things.</p>
<p>And I think one of our points would be that... that this Court should not force Congress to do that and should not force courts to do that by articulating a different delegation standard that would apply depending on which power Congress is, in fact, operating under.</p>
<p>That's one of the reasons why we think it doesn't make sense to say that there are two radically different standards of delegation and which one you apply would depend on which power of Congress we determined Congress to be acting under.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, then you should have no hesitancy in referring to these exactions as taxes.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Well, I refer to them as fees because Congress referred to them as fees.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: That's what the statute--</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: That's what the statute says.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --says.</p>
<p>Well, don't we at least have to know whether they are taxes in order to determine whether the bill properly originated in the house?</p>
<p>Did this bill originate in the House?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: This bill did originate in the House, Justice Scalia, but no claim has been raised in this case under the Origination Clause.</p>
<p>The Appellee--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: But I'm saying there... there is at least that constitutional reason to have to determine whether Congress was proceeding under the taxing power or under the Commerce Clause.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --Yes.</p>
<p>There... there may be reasons that arise in the Constitution that require the Court to determine what a tax is, although the cases I believe under the Origination Clause have been very reluctant to define with any precision exactly what a tax is.</p>
<p>All I'm saying is that in this case I don't think the Court has to come up with some constitutional definition of what a fee is.</p>
<p>The Constitution doesn't use the word "fee".</p>
<p>The Constitution grants Congress broad power under the Commerce Clause.</p>
<p>xxx.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Of course, the Origination Clause doesn't use the word "tax" either.</p>
<p>It's a bill for raising revenue.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Revenue.</p>
<p>That's correct.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Yes.</p>
<p>And the question I suppose is... one of the preliminary questions is whether this is a bill for raising revenue or not.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: That could potentially be a question.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: And you submit it is not I gather.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: The word "revenue" conceivably could have a different scope than the word "tax".</p>
<p>I understand, for example, that the House traditionally argued that revenue included appropriations as well as taxing bills.</p>
<p>The Senate disagreed with that.</p>
<p>So, there's... there are a lot of untested issues that could conceivably be raised by the Origination Clause.</p>
<p>But again, no claim has been made in this case that this particular provision violates the Origination Clause.</p>
<p>The Origination Clause came in through the side door in Appellee's brief in order to try to substantiate its more general argument about delegation.</p>
<p>Let... let me, if I can, though just... just complete noting the provisions in the statute that govern the setting of these fees because I think it is an important point.</p>
<p>The statute sets forth a single criterion for determining fees: pipeline usage.</p>
<p>It's not a multiple choice test in the sense that the Appellees suggest.</p>
<p>The statute does go on to set forth three factors that the agency can look at in trying to determine pipeline usage, but the ultimate standard that Congress enunciated was pipeline usage.</p>
<p>The statute also says that... that in... in determining pipeline usage by those factors that there must be a reasonable relationship between those factors and the determination of pipeline usage.</p>
<p>And finally, the statute says that in establishing the schedule, the Secretary shall take into account... take into consideration the allocation of departmental resources.</p>
<p>So, what we have here really is a... is by modern standards a highly precise statute, one that sets forth a number of constraints on the discretion of the Secretary of Transportation, and sets forth really four limitations on the type of... the schedule of fees that can be adopted.</p>
<p>I don't think that any serious claim could be made that this statute violates the intelligible principles standard of the J. W. Hampton case which this Court has most consistently applied in delegation cases.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Mr. Merrill, do you think Congress could determine the total amount it needs each year for all government services and obligations and then tell IRS to determine a rate and figure out how to raise the money?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: That, obviously, would be a far cry from what we have before us in this particular case.</p>
<p>Our contention... and I... I will get to it presently is that there should be no distinction in terms of the delegation standard that this Court applies to taxes as opposed to fees.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: So, you think Congress could do that.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: If Congress set forth a standard to confine the discretion of the agency and... and indicated its policy and did so in a way that meant that the agency's actions were subject to meaningful judicial review, yes, I think Congress can do that.</p>
<p>That strikes us as odd.</p>
<p>That strikes as sort of different from the traditions that we've come to expect in the area of taxation.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Me too.</p>
<p>You... me too.</p>
<p>You... you'd want us to review the... the... the assessment of taxes?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Well, I don't know that I would want the Court to review it under the delegation doctrine any differently than the Court has... has reviewed other major enactments under the delegation doctrine.</p>
<p>I think it... it strikes us as odd under our traditions, but those traditions have not been developed under the compulsion of any holding by this Court about the meaning of the power of taxation and how far Congress has to go in... in legislating with specificity under the taxing power.</p>
<p>The... Congress itself is responsible for having generated that tradition, and there's no reason to think at this point that Congress is about to abdicate or to give away that... that power which it has rather jealously protected over the years.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well--</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Certainly nothing in this statute suggests that Congress is about ready to abdicate in its... in its powers.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --One can say that all other delegations of... of authority can be... can be connected to some executive activity.</p>
<p>And you can say it's really just giving the executive discretion with respect to the performance of some distinctively executive activity.</p>
<p>Whereas taxation is... is so... so utterly independent of the performance of any executive duties.</p>
<p>Well, Congress gives the Internal Revenue Service discretion in implementing the tax codes.</p>
<p>There's a great deal of discretion exercised there.</p>
<p>In interpreting the... the tax code, but not--</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: And in promulgating regulations, including legislative regulations in some circumstances.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --But not fixing rates.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Generally, yes.</p>
<p>Congress does not tell the IRS to fix rates.</p>
<p>But I don't think that fixing rates can somehow be singled out or zeroed in on as... as a... as a... as a unique function as to which there can be absolutely no delegation by Congress whatsoever.</p>
<p>After all, fixing rates was exactly what was at issue in the J. W. Hampton case.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Nor does Congress tell IRS how much money to raise.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Nor does Congress tell IRS... Congress did not tell the DOT how much money to raise in this case either.</p>
<p>DOT can... is... has... is subject to a fixed limitation in any given year of 105 percent of its annual appropriations, and over time--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Yes, but they're supposed to get 100 percent of their costs of operating the program, aren't they?</p>
<p>Isn't the... the purpose of the fee schedule to reimburse the agency for its costs of operation.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --That's correct.</p>
<p>If the fee schedule works correctly, if they're not... if the collection of the fees is reasonably complete, over time the agency will recover 100 percent of its appropriated costs.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: See, if this... if this program is permissible, this is a way of raising additional revenues without increasing taxes, isn't it?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Yes.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Yes.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: And, in fact, the legislative history... I would have to be candid... suggests that the primary motivation for enacting the statute was concern with the Federal deficit.</p>
<p>But I don't think that that means it's unconstitutional as an unconstitutional delegation of power because if you look at the statute, the... the discretion is channeled quite narrowly here.</p>
<p>And we see no principal basis in the Constitution for a distinct delegation doctrine with respect to taxes as... as opposed to the regulation of interstate commerce.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: And user fees have the same effect too and the same attraction and are often imposed for the same reason.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Yes.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Instead of raising taxes, you impose user fees.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Yes, yes.</p>
<p>I mean, if you look at the history of the IOAA, for example, in 1952, there's a footnote in the National Cable case which recites a little bit of that history and indicates that Congress' motivation there was to reimburse the government for some of the expenses that it was incurring in providing benefits, privileges and licenses to people.</p>
<p>What Congress thought here was we have an industry which is engaged in an inherently dangerous activity, transporting natural gas and oil through pipelines.</p>
<p>We've adopted a regulatory program, and in order to try and limit those dangers, and doesn't it makes sense that the costs of doing that should be borne by the industry?</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, one can certainly agree wholly with that judgment, but regret that Congress can't make up its own mind about some of these things.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Congress made up its mind in this case.</p>
<p>If you... if the principle that Congress is operating under is that it wants an industry to bear the costs of a program, it seems sensible to me for Congress to direct the agency to establish the schedule of fees that is going to apportion those costs according to the degree to which each company in the industry is, in fact, creating the costs.</p>
<p>Congress could do it by some kind of fixed formula saying that the fees shall be X percent or something like that, but that would be more rigid and in a sense make less sense than simply telling the agency to do it.</p>
<p>And the agency's discretion here is not... is not broad.</p>
<p>They're supposed to do it according to pipeline usage.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, but you speak as if rigidity were something to be scorned.</p>
<p>But basically, the idea of legislation and administration suggests that, you know, there is going to be some rigidity in the legislation, that it doesn't entirely just lop over to the administrator.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: I agree with that.</p>
<p>And in the... in the taxation area, pure and simple, when we're talking about raising revenues in order to support public goods like defense and the national welfare system, rather than recovering the costs that... that the government has incurred in a particular program, that type of... of... of rigidity and... and setting of fixed rates based on broad distributional considerations and other factors makes complete sense.</p>
<p>And Congress, in fact, routinely does that.</p>
<p>But when Congress decides that it wants to recover the costs of a particular program from the persons who are responsible for that program, for the... for the need for that program, I don't think it's inappropriate for Congress to say that... that some discretion should be given to the agency in the apportionment of those costs among the people responsible for the... giving rise to the need for the program in the first place.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: What about Congress telling an agency to raise such taxes or such funds as may be in the public interest, convenience and necessity, which is a standard we've... we've approved in other contexts?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Well, Justice Scalia, at some point, obviously, you would start bumping up against--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Is that the point?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --the limitations that the Court identified in the Schechter Poultry case, for example.</p>
<p>I mean--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, but... but that... but we've... we've approved that language in other contexts.</p>
<p>Is that language okay for taxes too?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --I... our submission--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: If not, then there's a different standard for taxes.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --Our submission is that the same standard that the Court has articulated in the non-delegation context generally should be applied to exercises of the power of taxation.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: So, your answer is yes.</p>
<p>You could say raise taxes or raise... raise funds to the degree and in the manner that is in the public interest, convenience and necessity.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Well, if that's all the statute said, I think it would raise questions--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: That's all the Federal Communications Act says.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --Well, it says more than that.</p>
<p>I mean, it--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Not really.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --That... that's a particular standard for award of licenses.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Not really, for when broadcasting licenses are to be issued.</p>
<p>There's not much more.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: The standard for setting... awarding a license or setting a rate, but that standard appears within the context of a whole administrative mechanism which has been set up by Congress with general statements of purpose--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, yes, but the standard that Justice Scalia suggests would also appear in the history of... history of appropriations and the agency spent a certain amount of money over the years, and that sort of... they could decide what degree of activity of their own was in the public interest.</p>
<p>xxx.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --Yes.</p>
<p>I will admit that... that these... these... these problems are troubling, that they seem to be contrary to the traditions that we've operated under.</p>
<p>But I would... I would remind the Court about some of the reasons that... that the Court has cited for not applying a highly strict delegation standard in the commerce context and would suggest that those same reasons would also apply in the context of taxation.</p>
<p>Now, the two primary reasons I think, first of all, are just simple a practical problem that when you're operating a government the size of the Federal Government, Congress can't make all the policy decisions itself.</p>
<p>It has to utilize the executive branch or the... or executive agencies to decide supplementary issues of policy.</p>
<p>That has been a primary factor that has been cited in this Court in its cases.</p>
<p>The second is a definitional problem.</p>
<p>If you're going to draw the line between somehow fundamental policy issues and non-fundamental policy issues, how can the Court develop a workable standard for differentiating between those two types of questions.</p>
<p>That's... those sort of considerations have haunted the delegation doctrine in... in the context... in the traditional context.</p>
<p>And I think they would be equally applicable here.</p>
<p>Appellees say, well, it's different when we're talking about the allocation of the tax burden.</p>
<p>That's somehow special.</p>
<p>But the allocation of the tax burden is not just simply a function of tax rates.</p>
<p>It's a function of the definition of income.</p>
<p>It's the function of what's deductible.</p>
<p>It's the function of what kind of credits you get.</p>
<p>And the Internal Revenue, for example, has to exercise a lot of discretion in a lot of areas in determining those things.</p>
<p>And so, the ultimate allocation of a tax burden is not something that Congress itself can make every... every... every single decision about.</p>
<p>And so, we... we just... Appellees have not suggested really a meaningful intermediate standard for delegation that would apply to the taxation [inaudible], but not to the--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: How much... how much damage would be done to... to our prior history in cases if we simply held that the taxing power is non-delegable?</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --If you held that the taxing power was non-delegable?</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Yes.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Well, I don't know what that would mean.</p>
<p>I mean, the taxing power is non-delegable.</p>
<p>The commerce power is non-delegable.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Rules for raising revenue have to originate in the House and follow the procedure.</p>
<p>That's all.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Semantically I don't think the correct reading of this Court's cases is that any of Congress' powers are delegable in the sense that the entire power can be transferred to somebody else.</p>
<p>The issue this raises is how much discretion can Congress give to the executive in implementing statutes that it enacts pursuant to its multiple powers.</p>
<p>We think in answering that question, how much discretion can you give before you have somehow deemed to have delegated or deemed to have abdicated that the Court... that the only standard we can think of... the only standard that anybody has really suggested is the standard of J. W. Hampton and Schechter Poultry and so forth.</p>
<p>And... and for the Court to somehow suggest that taxation is different would send us down the road of having to consider all sorts of challenges to tax statutes in a variety of contexts based on the need, first of all, to come up with an abstract definition of taxes as opposed to something else and then, secondly, to try and figure out what this new delegation standard actually means.</p>
<p>Appellees have identified nothing in the text of the Constitution that would differentiate the taxing power from the commerce power.</p>
<p>They certainly don't suggest that Article I, Section 8, Clause 1, which sets forth the power to lay and collect taxes itself, provides a textual basis.</p>
<p>They focused almost exclusively on the Origination Clause.</p>
<p>I think there are three reasons why the Origination Clause cannot plausibly be cited as a source for some kind of hyper delegation standard that applies only to taxation.</p>
<p>First of all, the Origination Clause doesn't say anything more about the degree of precision that Congress has to use in passing tax statutes than does Article I, Section 8, the Taxing Clause itself.</p>
<p>Secondly, insofar as the Origination Clause can be read as reflecting a policy judgment by the Framers that issues of taxation should remain closer to the people than other types of decisions, the Framers provided a procedural mechanism for realizing that policy.</p>
<p>They said that tax bills had to originate in the House.</p>
<p>This bill did originate in the House.</p>
<p>There's no dispute about that, and so the procedural mechanism that Congress adopted to vindicate its policy has been satisfied.</p>
<p>Finally, appellees have quoted to the Court the first half of the Origination Clause which says that</p>
<p>"all bills for raising revenue shall originate in the house of representatives. "</p>
<p>but they haven't quoted or relied on the second half of the Origination Clause which says</p>
<p>"but the senate may propose or concur. "</p>
<p>in "amendments as on other bills".</p>
<p>So, unlike the British tradition, for example, where the House of Commons got to initiate revenue measures and the House of Lords could only approve or disapprove, vote up or down on that, the Framers rejected that and gave the Senate the power to amend or propose alternative measures even though the bills are originated by the House.</p>
<p>This is a much more diluted principle of popular accountability than one would have under the British system or that one would have if all you had was the first half of the Origination Clause.</p>
<p>And we don't understand how you get from that diluted principle of accountability, how you make the logical leap from that to the proposition that Congress can give the executive no discretion in implementing the tax laws.</p>
<p>There seems to be too much of a... of a gulf there in order to sustain the proposition the Appellee wants to sustain.</p>
<p>Let me turn to the second--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: I'm not... I'm not sure I... I followed all of that argument of--</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --Well--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --It doesn't... it doesn't apply to the delegation doctrine.</p>
<p>The delegation doctrine, we see if the legislature is delegating its powers.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --The Appellees have argued, Justice Kennedy, that you can find this policy in the Origination Clause that says that matters of taxes have to be kept close to the people.</p>
<p>The House of Representatives at the time the Constitution was framed was directly elected, but the Senate was not.</p>
<p>And so, Appellees concluded from that matters of tax have to be decided by what today are... are both the House and the elected Senate to a greater extent than can be decided by an executive branch agency which is only--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: We still have to identify a revenue bill and we still have... we still have to identify a revenue bill and we still have to make sure that it originates in the House.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --The Origination Clause, of course, still applies.</p>
<p>They're not... and they're not disputing that it was violated in this case.</p>
<p>They're trying to find this policy in it.</p>
<p>And all I'm suggesting is--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: And you're not saying it has no policy reason.</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: --No.</p>
<p>All I'm suggesting is that if there is a policy of popular accountability, It's not the dramatic one they suggest.</p>
<p>It's a qualified one because the Senate, at the time the Constitution was adopted, was not directly elected and that the Framers contemplated that the Senate would have the power to propose amendments to revenue bills which, of course, today the Senate is directly elected by the people, and so we have perhaps more accountability than the Framers even anticipated under the Origination Clause.</p>
<p>Let me make just one quick point about the second issue: Is this a tax or is this a fee?</p>
<p>I don't think that's the correct way to ask the question.</p>
<p>The correct way to ask the question is could Congress adopt this provision under its commerce power.</p>
<p>And I think if you think quickly about two hypothetical... or two statutes, you can see my point that Congress ought to be able to have the power under the Commerce Clause to enact this particular statute.</p>
<p>One statute would impose strict liability on all pipelines for accidents caused by the pipeline... fires, explosions and so forth... and would require the pipelines to pay damages to persons that are injured.</p>
<p>The second statute would adopt a scheme of regulation setting the safety standards and enforcement to ensure that accidents don't happen, and then imposes on the pipelines the costs of paying for that scheme of regulation.</p>
<p>The second statute is really what we have in this case.</p>
<p>I can't see any question that the first statute would be sustainable under the commerce power, and if that's the case, I think the second ought to be sustainable under the commerce power as well.</p>
<p>I'd like to reserve the balance of my time for rebuttal, if I might.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Very well, Mr. Merrill.</p>
<p>Mr. McMillan?</p>
<p>ORAL ARGUMENT OF RICHARD McMILLAN, JR. ON BEHALF OF THE APPELLEE</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: Mr. Chief Justice, and may it please the Court.</p>
<p>The issue in this case, of course, is not whether the Framers were committed to the proposition that taxation and legislative accountability for taxation were important.</p>
<p>That proposition, that elected representatives should be accountable for their votes on tax matters, was accepted by everyone.</p>
<p>The issue is whether or not that deeply held belief was actually incorporated into the text of the Constitution so that it actually binds Congress today when Congress is not so sure it likes the idea of that accountability.</p>
<p>The Constitution says that</p>
<p>"all bills for raising revenue shall originate in the house of representatives. "</p>
<p>And when the Constitution says "all bills", it is using in constitutional language the only word that meant law making.</p>
<p>You couldn't pass... you couldn't make a law without introducing a bill.</p>
<p>And it might be sufficient to just stop there and accept the Constitution at its word, that all revenue-making bills or laws must originate in the House of Representatives.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, this one did.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: Section 7005 originated--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Right.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --but the decision that we're complaining about did not.</p>
<p>The decision that we're complaining about is setting a tax rate.</p>
<p>You can't have a revenue-raising bill without setting a revenue rate or a tax rate.</p>
<p>That decision was not made by Congress.</p>
<p>That decision was made in the Department of Transportation.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Hasn't the President been given the power on some occasions to establish the... the levels of... of importation fees on oil and on other matters as well?</p>
<p>Isn't that... isn't that a revenue-raising measure?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: Well, if we take the Hampton case, for example, in Hampton, Congress said that they wanted a tariff equal to the difference between the cost of production at home and abroad.</p>
<p>And it asked, and properly asked, the executive to become involved in the implementation of that statute to determine over time what the cost of abroad--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Right.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --of production abroad and at home were.</p>
<p>But that arithmetic calculation was... was no more than that.</p>
<p>So, in that case, no.</p>
<p>There was not specific rate of duty imposed.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Why is this one less... less arithmetic?</p>
<p>Because the particular individuals to pay it are not... are not as well identified?</p>
<p>Is that--</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: No.</p>
<p>This case is not arithmetic because the agency was given four ways to set the tax rate.</p>
<p>They could choose one of four rates in effect.</p>
<p>They could base the rate on miles, on volume miles, on revenues or some combination.</p>
<p>And it makes a big difference whether you choose miles or volume miles.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --Well, I guess in Hampton there were a lot of different ways of competing whether the goods were being subsidized abroad or whether... you know, whatever the President had to determine there.</p>
<p>There were probably a dozen different ways of going about making that factual inquiry.</p>
<p>And the President could have decided to do it in one way or another.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: There is a basic difference we think between establishing a rate of tax.</p>
<p>We're talking about revenue raising under the... under the Origination Clause.</p>
<p>We think there is a basic difference between establishing that rate of tax in the context of taxation and making determinations about findings of fact, case-by-case determinations in response to changing conditions over time.</p>
<p>That's what was happening in Hampton.</p>
<p>It was a case that involved regulation of commerce.</p>
<p>It involved the imposition of duties on foreign commerce as a way of regulating foreign commerce.</p>
<p>It did not involve the setting of tax rates for purposes of funding the Federal Government.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Doesn't the President have... he has all sorts of powers under the Trading with the Enemy Act.</p>
<p>But I recall that the President has, on his own, established import... import fees on... on oil.</p>
<p>Hasn't... hasn't... hasn't that happened?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: I don't know.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Do you think the President could... could be given the authority in the event of a... if he thinks the national interest requires it, to impose an import fee on... on petroleum?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: I think the President... let me give two answers to that.</p>
<p>First of all, I think that if the President is acting under some power other than the taxing power, under the war powers power, for example, then perhaps he could do that under that power.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, here he's acting under the commerce power, but your... your argument is, yes, he may be acting under the commerce power, but this is raising revenue.</p>
<p>Now, the hypo I gave you... it's the same.</p>
<p>He's acting under the war power, under all sorts of powers, but he's raising revenue by... by imposing a... an import fee on... on oil.</p>
<p>What I'm suggesting is it's very hard to adopt an absolute rule that the executive cannot be given discretion as to whether to raise revenue or not.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: To me, Your honor, the rule basically boils down to whether or not it's a zero sum game.</p>
<p>Revenue raising... let me... let me just take the New England Power case as an illustration of that zero sum game principle, and New England Power I choose because that involved natural gas pipelines, just as this case involves natural gas pipelines.</p>
<p>In New England Power, there was a set of regulations.</p>
<p>And the government came in and made the argument that they're making today; namely, those regulations benefit these pipelines.</p>
<p>And the Court said fine.</p>
<p>If you can point to a benefit that you are conferring on a specific individual or company by your regulatory action, fine, then charge them for it.</p>
<p>There's a quid pro quo involved there.</p>
<p>Something goes this way and you pay a fee in return for it.</p>
<p>But it what you are doing is raising revenue for the public purpose, if you are doing something other than simply trying to make entrepreneurs rich, which was the language Justice Douglas used, and are going beyond that to satisfy a public purpose, then you are raising revenue, and when you are raising revenue, you come under constitutional concerns that are different.</p>
<p>I think we can take that much away from National Cable and New England Power.</p>
<p>What the difference is we are here today to decide.</p>
<p>And the first place we need to look is the Origination Clause.</p>
<p>We can look at the structure of that clause.</p>
<p>It is the first enumerated provision in Section 7 of Article I which contains not only the Origination Clause, of course, but the Presentment Clause and the principles of bicameralism.</p>
<p>It has words that are meaningful.</p>
<p>Bills were the constitutional term for law making.</p>
<p>And "originate" in a dictionary at least means to bring into being.</p>
<p>Tax law making must be brought into being through bills in the House of Representatives.</p>
<p>And we know from looking at the history of this clause, that it symbolized legislative accountability for tax matters.</p>
<p>It was part of the great compromise.</p>
<p>It was ardently championed by some of our most famous forbearers.</p>
<p>And it was a proposition not simply that the executive should not be involved in raising taxes, but that not even the Senate should play the role of originating that idea.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: But it doesn't say that the rates have to be fixed in those bills, does it?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: It... well, this Court will have to decide what a bill to raise revenue means.</p>
<p>If this Court thinks you can raise revenue without setting a rate, then a bill to raise revenue that said nothing about rates wouldn't be covered by the Origination Clause.</p>
<p>But if the notion of the Framers, if the history of this clause means anything... that is, that the basic decisions about taxes have got to be made by Congressmen... then the decision about rates is the central issue, perhaps the number one issue that you have to find in that bill before you can move past the Origination Clause and even worry about whether there are intelligible principles for doing something else.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: xxx.</p>
<p>What do you do about Treasury Department regulations which... which assuredly determine who will pay taxes and what rates will be for particular individuals?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: There is a--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: A lot of discretion as... as to how to write them.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --There is a profound difference in fact between the regulations of other agencies which this Court has approved as lawmaking or quasi lawmaking and Internal Revenue regulations which, as Your Honor mentioned in Mr. Merrill's argument, are interpretive.</p>
<p>There is a big difference between the IRS' role which is to interpret what Congress had... had to say in a way not binding on this Court and an independent legislative sort of lawmaking function that... that we've seen with other agencies.</p>
<p>So, I think--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: You think... you think that's a constitutional line between interpretive regulations and... and legislative regulation.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --I--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: So, you... you think this one would be okay if instead of what they said, Congress simply said you shall raise a reasonable amount of money assessed... by assessing... assessing these charges in a reasonable fashion.</p>
<p>Then the agency would have been interpreting the word "reasonable" and it would have been okay.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --No, absolutely not.</p>
<p>I think--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, then... then the constitutional line has nothing to do with interpretive or not.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --No.</p>
<p>I believe the constitutional line does.</p>
<p>There is a distinction between giving the agency a lawmaking function and an interpretive function.</p>
<p>In the interpretive function situation, the only lawmaking body remains Congress.</p>
<p>And--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: That depends on... on how broad the word you're interpreting is.</p>
<p>I mean, in some agencies, the... the word is "reasonable".</p>
<p>And if that's going to satisfy you that the Constitution has been complied with, so long as you say, instead of spelling out what they spelled out here, which I think it is a lot better, if the... if the Congress had simply said, you know, impose a reasonable... reasonable fees in a reasonable fashion, then it would all be interpretive and it's all okay.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --Let's take that hypothetical and be specific about it.</p>
<p>Congress passes a law that says the IRS set just and reasonable taxes.</p>
<p>There are two things wrong with that.</p>
<p>First of all, a point that I was trying to make and apparently haven't made very successfully is that the interpretive function, which is all the IRS does... the interpretive function asks Congress... I mean, asks the agency to decide what did those words mean just... what did those words mean.</p>
<p>That's something... that interpretation then has no law-making function and certainly couldn't rise to the level, we don't think, of establishing a rate, a rate for tax.</p>
<p>But even if there was... even if they said just and reasonable rates, there's a... there's a fundamental problem with whether or not Congress has made the decision.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: I agree with that.</p>
<p>I'm not... I'm not questioning that.</p>
<p>I'm just questioning whether you can say that the critical distinction is between whether it's interpretive or non-interpretive because depending upon how... how vague the word you are supposedly interpreting it is, you can... you can achieve equally undemocratic results either way.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: At a practical level, perhaps.</p>
<p>I... I was only trying to make the point that we're here to decide where the law-making function ought to reside for purposes of taxation.</p>
<p>And giving an agency interpretive power does not transfer that law-making function away from an agency.</p>
<p>Giving it law-making... legislative rule-making powers does.</p>
<p>We know why this concept of legislative accountability for taxation was so important.</p>
<p>We see it in the newspapers regularly.</p>
<p>We... we saw it in a... in a somewhat different context recently when Congress voted down the congressional and judicial pay raises.</p>
<p>We may not like that result, but we know why it happened.</p>
<p>It happened because Congress had to vote, and when Congress has to vote on an issue as sensitive as taxation, we know it's going to affect the result, and we know that's what the Framers intended.</p>
<p>So, we do think as a matter of the first issue that the Origination Clause is violated here, that if you look at the structure of that clause, at the words that it uses, at the history of that clause, you can only conclude that the decision made here by the Department of Transportation did not originate in a bill of the House.</p>
<p>It originated in a notice in the Federal Register.</p>
<p>There is a second issue which we have raised in the alternative to the Origination Clause issue, which posits the question of what if the Origination Clause is not by itself dispositive of whether or not some... someone other than Congress can tax.</p>
<p>It has to do with what we mean by the term "execution of the laws" in the context of taxation.</p>
<p>Let me start with a proposition that I don't think will be disputed.</p>
<p>The Congress cannot delegate legislative power to the President is a principle universally recognized as vital to the integrity and maintenance of the system of government ordained by the Constitution.</p>
<p>That quote from Field and Clark has been quoted innumerable times in decisions of this Court.</p>
<p>The question is does it mean anything.</p>
<p>Without reaching the issue of taxation, the context of taxation here, I think we can begin with the proposition that whenever this Court has sustained the delegation of law making to an agency, it has always been a predicate for that ruling, that there was something to execute.</p>
<p>There was some program to implement.</p>
<p>There were case-by-case determinations over time in response to changing conditions or whatever.</p>
<p>We found that in Hampton.</p>
<p>It was true in Mistretta.</p>
<p>In short, there has to be a program to execute, perhaps details to fill in with respect to that program, but not the central issue of how much someone is going to pay, not simply a decision to make.</p>
<p>And we know that the--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: What was that in Mistretta?</p>
<p>I... I don't recognize your description of what the Court said in Mistretta at all.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --The Court in Mistretta--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: It's a good description of the dissent, but--</p>
<p>[Laughter]</p>
<p>--but I don't--</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --The--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --What... what was the executive function that was being performed--</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --The--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --other than the making of rules?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --The quote from Mistretta that I was referring to was this.</p>
<p>"Developing proportionate penalties for hundreds of different crimes by virtually a limitless array of offenders is precisely the sort of intricate, labor-intensive task for which delegation to an expert body is especially appropriate. "</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Writing tax laws may be.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: The Department of Transportation has never been thought of as a expert agency on writing tax laws.</p>
<p>This... this Court in the Lichter case and in other cases has, in looking at what we mean by execution of the law and delegation, held specifically that we ought to be concerned with the nature of the power that is being invoked.</p>
<p>In Lichter it was a war powers situation, and the Court found that in that context, there was... it was particularly appropriate to find the delegation.</p>
<p>And in--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Mr. McMillan, supposing in this case that Congress had said this safety program is costing us $100 million a year, we want the... that money raised from the pipeline companies and all of them, and we want it raised on a basis of usage of the pipelines.</p>
<p>Now, that may be a little bit different from this case, but it's... to the extent it is a hypothetical.</p>
<p>Is... is that unlawful delegation?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --Yes.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Why?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: It... it is really precisely the New England Power fact pattern in a sense.</p>
<p>It's really exactly New England Power.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, but didn't the Court in New England Power say that Congress had not delegated to the FPC?</p>
<p>It didn't say Congress couldn't have delegated, did it?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: The Court didn't reach the third... they reached two issues and didn't reach a third.</p>
<p>They found this is unquestionably taxes.</p>
<p>They found that the label, the tax label, makes a difference for constitutional purposes, but on the third issue, what difference does it make, they didn't reach it.</p>
<p>We're here today to argue that the taxing power, that is, the basic decisions about raising revenue, including the most central decision of all, who was going to pay how much, cannot be delegated to an agency regardless of whether or not the standard is usage or something else that's--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: But how much... how much discretion really is delegated here if you say that there's $100 million to be raised?</p>
<p>We want it raised from all pipeline users.</p>
<p>Now, all the agency has to do is go out and count in that case.</p>
<p>And we want it paid... paid by them or raised from them on the basis of pipeline usage.</p>
<p>You could just refer to statistics.</p>
<p>Is the--</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --Mid-America is here not because it cares how much the industry is going to pay.</p>
<p>Mid-America is here because if you choose miles, as distinguished from volume miles, the tax we pay is very different.</p>
<p>And there is no distinction.</p>
<p>We talk about $100 million or $9 million.</p>
<p>There is no distinction between the DOT program here and the Interstate Commerce Commission or the Securities and Exchange Commission or the Federal Aviation Administration or any number of other agencies.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --Well, that simply means we ought to get it right in this case I guess.</p>
<p>[Laughter]</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: We... we should get it right in this case.</p>
<p>Absolutely.</p>
<p>We should expect that the financing of a major part of the Federal Government by taxes is going to be made according to a set of basic decisions made in Congress.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, supposing in... in this case the Congress had added volume miles so that there really was very little discretion left in that area.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: If they had said volume miles, then we're... we wouldn't be here because that... there isn't any discretion.</p>
<p>That is the selection of a formula which you go out to the industry and find out what are the volume miles which... for your pipeline, what are for you.</p>
<p>You plug that into a pocket calculator, and out comes the number.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Mr. McMillan, I don't... tell you the truth, I don't see what's so sacrosanct about taxes.</p>
<p>I mean, we have... we have an agency here, the Department of Transportation, that is allowed to adopt all sorts of rules with broad discretion, that can say what I can do or what I can't do.</p>
<p>They can make things unlawful.</p>
<p>It's authorized even to adjudicate civil penalties against me for violating those rules.</p>
<p>And yet, somehow we... we pass some... some threshold of impermissibility when... when they're given authority to say how much money is to be raised from... from pipelines.</p>
<p>I... I don't feel that I'm suddenly in a... in a new world when... when that happens.</p>
<p>I mean--</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: Well--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: --Had we not given Transportation all these other powers, I could understand it.</p>
<p>But what's so... what's so ugly about taxes?</p>
<p>I don't understand it.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --Well, with all due respect, Your Honor, I don't... it's not a question of whether you feel uncomfortable or I feel uncomfortable or even whether the Framers felt uncomfortable.</p>
<p>The question is what does the Constitution require, and there is no way of understanding the Origination Clause and where it traces from without understanding that as a symbol of legislative accountability in the tax area.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Well, no, not legislative accountability.</p>
<p>House accountability.</p>
<p>What it says is when there is a tax bill, it has to be... originate in the House, just as in other areas it says when there is a bill on anything, it has to pass both houses and has to be presented to the President.</p>
<p>But neither of those two says when there has to be a bill.</p>
<p>It just says what must happen when there is a bill.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: It means legislative accountability and House accountability.</p>
<p>It means not only will the executive not be involved in this decision, but even the Senate's involvement will be limited.</p>
<p>That's the... that's what the Framers had in mind and that's what's--</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: If that decision is to be made by... by law, as opposed to having it made by the executive.</p>
<p>Yes.</p>
<p>When that is so, it must be done that way, just as you can say in other areas, whenever the decision is to be made by law, the Senate has to agree to it and the House has to agree to it and the President has to sign it.</p>
<p>But that doesn't speak to whether it must be made by law or can instead be delegated to the President.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: --We are here today arguing that the decision about what Mid-America is going to pay, what its tax rate is going to be can only be made by law.</p>
<p>I don't think that's a particularly surprising provision.</p>
<p>That's what the Constitution says.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: xxx so.</p>
<p>I don't see anything so... so quite different about taxes as opposed to... to offenses that... that can be made unlawful by... by the President without... without a law.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: Offense... offenses are a zero sum game in the way that revenue raising isn't.</p>
<p>If you do something wrong, your... you pay back for it.</p>
<p>You... you pay to make it right, so to speak.</p>
<p>That's a zero sum game that comes in under a different sort of a... of a constitutional power.</p>
<p>When you raise revenue for the public good for discretionary spending, that is a issue that is covered by a discrete set of constitutional provisions.</p>
<p>There's no way to get away from the fact that the Constitution treats taxation differently than it treats other powers, not only in the Origination Clause but in other clauses.</p>
<p>Taxation is different under the Constitution.</p>
<p>Mid-America is here sharing some of the... some of those original concerns.</p>
<p>Tax should be called a tax.</p>
<p>If someone is going to decide what Mid-America is going to pay to support this program, it ought to be Congress.</p>
<p>It ought not to be an invisible employee of the Department of Transportation.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: May I ask?</p>
<p>Under your view if the Congress delegated to the Department of Transportation the decision of which roads in the Federal highway system should become toll roads and to set the right rates in an effort to reimburse the government for the cost of the roads, would that be permissible?</p>
<p>And they charge a user fee in the form of tolls, but the purpose of the user fee would be to pay back the government for building the roads.</p>
<p>And now would that be different from this?</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: The Court in National Cable I think found that if you are talking about a user fee, it doesn't rise to the level of something that the constitutional concerns associated with taxation are concerned about.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: So, that would be all right.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: Yes.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Yes.</p>
<!-- Richard_Mcmillan_Jr--><p><b>Mr. McMillan</b>: In closing, I would just go back to a point that I started with that the decision we are talking here originated in the Department of Transportation.</p>
<p>There is a difference between bills for raising revenue and notices in the Federal Register.</p>
<p>Thank you.</p>
<!-- Unidentified_Justice--><p><b> Unidentified Justice</b>: Thank you, Mr. McMillan.</p>
<p>Mr. Merrill, do you have rebuttal?</p>
<p>You have three minutes remaining.</p>
<p>REBUTTAL ARGUMENT OF THOMAS W. MERRILL</p>
<!-- Thomas_W_Merrill--><p><b>Mr. Merrill</b>: Two quick points.</p>
<p>First, with respect to the argument that the DOT regulations violate the Origination Clause in this case because the regulations didn't originate in the House of Representatives, that argument would call into question the validity of every single regulation issued by the Treasury Department.</p>
<p>And it's simply not the case that all Treasury regulations are interpretive regulations.</p>
<p>One of them, which is cited in Appellee's brief at page 19, Section... under Section 1502 of the Internal Revenue Code, specifically provides authority to the Secretary to adopt legislative regulations.</p>
<p>And it's not true that that's some kind of esoteric housekeeping provision.</p>
<p>It has to do with establishing standards for allocating income and expenses among affiliated corporations when they file a consolidated return.</p>
<p>And those regulations and the decisions made under them have an extremely major impact on the allocation of the tax burden among affiliated corporations, how much income tax they pay and what kind of capital gains they're subject to.</p>
<p>And with respect to Justice Scalia's question about the President's imposing a fee on imported oil, yes, under the Trade Expansion Act in the early 1970s, the decision was made by President Ford to substitute for a system of oil import quotas a system of oil import fees.</p>
<p>And this Court unanimously sustained that against a non-delegation challenge in the case of FEA v. Algonquio which is at 5426 of the United States Reports.</p>
<p>Thank you.</p>
<!-- William_H_Rehnquist--><p><b>Chief Justice William H. Rehnquist</b>: Thank you, Mr. Merrill.</p>
<p>The case is submitted.</p>
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Attribution:&nbsp;</div>
The OYEZ Project </div>
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Featured:&nbsp;</div>
No </div>
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Sun, 06 Feb 2011 03:46:02 +000056989 at http://www.oyez.orgFPC v. Memphis Light, Gas & Water Division - Oral Argumenthttp://www.oyez.org/cases/1970-1979/1972/1972_72_486/argument
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Case:&nbsp;</div>
<a href="/cases/1970-1979/1972/1972_72_486">FPC v. Memphis Light, Gas &amp; Water Division</a> </div>
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<div class="filefield-file"><img class="filefield-icon field-icon-audio-mpeg" alt="audio/mpeg icon" src="http://www.oyez.org/sites/default/modules/filefield/icons/audio-x-generic.png" /><a href="http://www.oyez.org/sites/default/files/audio/cases/1972/72-486_19730327-argument.mp3" type="audio/mpeg; length=15292398">72-486_19730327-argument.mp3</a></div> </div>
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Transcript:&nbsp;</div>
<p>Argument of Samuel Huntington</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: We’ll hear arguments next in 72-486 and 488, Federal Power against Memphis Light and Texas Gas Transmission against Memphis Light consolidated.</p>
<p>Mr. Huntington, you may proceed whenever you’re ready.</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: Mr. Chief Justice and may it please the Court.</p>
<p>These consolidated cases are here in writ of certiorari to the United States Court of Appeals to the District of Columbia Circuit.</p>
<p>The basic question presented is whether the Federal Power Commission is barred by Section 441 of the Tax Reform Act of 1969 from permitting a company subject to its jurisdiction to seize flowing through to the company’s customers in the form of lower rates.</p>
<p>The benefits derived from the use of accelerated depreciation on certain property.</p>
<p>If the Tax Reform Act is not by such action, the question arises whether the Commission’s action in this case was improper.</p>
<p>Before I discuss the facts of this case, some introduction is appropriate.</p>
<p>It has wrong been established that Federal Income Taxes are includable as an expense under the cost of service method used by the Federal Power Commission in ratemaking.</p>
<p>Accelerated tax depreciation was first authorized by in 1954 with the adoption of Section 167 of the Internal Revenue Code.</p>
<p>Under accelerated tax depreciation, deductions for a particular asset are relatively high in its early years and relatively low in its later years compared to what they would have been had straight-line tax depreciation been used.</p>
<p>When the matter first came before the Commission in a ratemaking context, the Commission determined that the use of accelerated tax depreciation simply resulted in a tax deferral.</p>
<p>Accordingly, the Commission decided that for ratemaking purposes a company’s taxes should be normalized, that --</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: When you say the matter first came, you’re talking historically not about this particular proceeding?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: That’s right, historically; it back was in 1956 or so.</p>
<p>The Commission decided that the -- for ratemaking purposes, the tax should be normalized and by normalized, it means that they should be calculated as if the company had used straight-line tax depreciation.</p>
<p>The difference between the taxes actually paid and the higher normalized taxes claimed as cost of service was required to be placed in a special tax reserve account for the payment of future taxes.</p>
<p>Several years later, the Commission in the Alabama-Tennessee case reconsidered the matter.</p>
<p>It concluded there that the use of accelerated tax depreciation resulted in a permanent tax savings.</p>
<p>This conclusion was squarely based on the Commission’s finding that the natural gas industry would continue to expand rapidly for the foreseeable future, an assumption which is certainly not true today.</p>
<p>The Commission noted that when an expanding company uses accelerated tax depreciation sufficient tax depreciation deductions on new property are available to all set declining tax depreciation deductions on all property.</p>
<p>The Commission does ordered natural gas companies using accelerated depreciation for tax purposes.</p>
<p>To also use accelerated tax depreciation for ratemaking purposes.</p>
<p>In this way, the benefits of accelerated tax depreciation would be flowed through to the company’s customers.</p>
<p>It’s important to note that both the Commission’s normalization order and its flow-through order were upheld by various Courts of Appeals as being within the Commission’s discretion.</p>
<p>Other regulatory agencies are sharply divided on this issue.</p>
<p>In short, the matter is in technical one turns in large part on an analysis of particular facts pertaining to give an industry and is precisely the type of question which falls within the broad discretion that regulatory agencies have over ratemaking.</p>
<p>This brings us to Section 441 of the Tax Reform Act of 1969.</p>
<p>As the legislative history of the Act makes clear, Congress was concerned with the lost of revenues to the Government resulting from the use of accelerated tax depreciation by public utilities.</p>
<p>Rather than prohibit the use of accelerated tax depreciation all together, Congress chose simply to bar future shifts to faster methods of depreciation.</p>
<p>With respect to existing or pre-1970 property, the statute permits the use of one straight-line tax depreciation, two, accelerated depreciation with normalization if the utility had been using accelerated depreciation when the Act was passed; and three, accelerated depreciation with “flow-through” if the company had been using “flow-through” when the Act was passed.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: May I ask you a couple of questions, does the record of the -- does the legislative history show why Congress is concern was limited to the impact of accelerated depreciation only with respect to public utilities?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: No, it doesn’t -- not that I’m aware of.</p>
<p>They did focused on the practice while there’s a double revenue loss when --</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: I lost the point.</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: Accelerated tax depreciation is flow-through.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Well now that’s what I want to get.</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: There’s first the loss resulting to the increase that deduction --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Of tax remedy – because of the higher deduction there’s a lower tax remedy?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: And then secondly, there’s a lower rates due to the flow-through which means that there’s less revenues to be taxed by the utilities -- have less revenues coming in to be taxed because the benefits are passed on in lower rates.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: I see, so there’s a first of all a -- I see everything that lower rates to the consumers?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: Lower rates to the consumer.</p>
<p>Now, similar rules apply to new or post 1969 property, but with respect to new property which expands a company’s capacity, an additional rule was adopted. Under Section 167 (l) (4) (a) of the code regulated companies on “flow-through” were given the right to elect not to have “flow-through” apply to their expansion of property.</p>
<p>As the legislative history of the statute indicates the effect of this provision is to permit companies in making the election to use straight-line tax depreciation without having to obtain the approval of the regulatory authority.</p>
<p>In an order upheld by the court below and not an issue here, the Federal Power Commission announced as a general policy, it would permit companies making the election to use normalization on their expansion property.</p>
<p>I come now to this case after the Tax Reform Act was enacted, Texas Gas Transmission Corporation, the petitioner here indicated to the Commission in a pending rate proceeding that it would make the election not to use “flow-through” on its expansion property.</p>
<p>The company sought the Commission’s permission to use --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: What was the company use?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: Well, it said that it would use -- it sought permission to use normalization on the expansion property as well as on its existing property.</p>
<p>It said that if the Commission did not give a permission to use normalization, it would straight-line depreciation on its expansion property.</p>
<p>The Commission granted the Commission both to with respect to expansion property and existing property.</p>
<p>The Commission found that once Texas Gas had switch to normalization on its expansion property, tax depreciation on that property would no longer be available to offset declining tax depreciation on existing and replacement property.</p>
<p>The reason it would no longer be available, is that under normalization benefits from the use of accelerated depreciation on expansion property are placed in a deferred tax reserve account and may only be use to pay future taxes on the expansion property.</p>
<p>The deferred tax reserve is the very essence of normalization and its part of the statutory definition of normalization in the Tax Reform Act, that Section 167 (l) (3) (g), the definition section of the Act.</p>
<p>With expansion property out of the picture, the Commission concluded that the use of accelerated tax depreciation on existing and replacement property would no longer resolve in a permanent tax savings.</p>
<p>Under these circumstances, the Commission held that the use of normalization on all of the property of Texas Gas would lead to more stable tax cost for ratemaking purpose and it would in the public interest.</p>
<p>The Court of Appeals did not reach the ultimate merits of the Commission’s order but held that Section 441 of the Tax Reform Act foreclose the Commission from permitting switches from flow-through to normalization.</p>
<p>It is to that issue, I will now turn.</p>
<p>There is nothing on the face Section 441 which suggests that regulatory agencies may not permit shifts from flow-through to normalization.</p>
<p>As I have noted, the statute merely lists the permissible methods of tax depreciation in such a way as to bar shifts from slower to faster methods of depreciation.</p>
<p>Under the literal terms of the stature, companies on “flow-through” qualify for all three methods of depreciation that a straight-line depreciation accelerated, depreciation with normalization and accelerated depreciation with flow-through.</p>
<p>The election provision simply gives a company the right to elect not to use “flow-through” on expansion property.</p>
<p>The legislative history of the statute confirms that the statute does not bar ships from “flow-through” to normalization with appropriate regulatory agency approval.</p>
<p>The House Report on the initial version which did not include the election provision.</p>
<p>The House Report describes the effect of the bill in three general rules.</p>
<p>The House Report describes these three general rules.</p>
<p>The third rule in the House Report is that if “flow-through” is being use, the tax payer must continue to use “flow-through” unless the appropriate regulatory agency permits a change as to that property.</p>
<p>Respondents argue vigorously that this third general rule refer to in the House Report was displaced by the election provision.</p>
<p>The election provision was first added by the Senate to apply to all property and later restricted in conference to apply only to expansion property.</p>
<p>It is our submission that the election provision does not affect a regulatory agency’s authority to permit companies to abandon “flow-through.”</p>
<p>All the election provision does is to give utilities the absolute right without having to go to the agency first to get off “flow-through.”</p>
<p>This was not provided in the House Bill, the only way agency could get of “flow-through” under the House Bill was to get the regulatory agency’s approval.</p>
<p>Now, we have quoted the relevant excerpts of the Senate Report and the Conference Report in our brief at pages 23 to 25.</p>
<p>And that we submit that a reading of those reports clearly supports our position.</p>
<p>In fact, respondents studiously avoid a direct confrontation with the pertinent provisions of these two reports, which we submit are very pertinent indeed.</p>
<p>Respondents also vigorously argue that certain language in the House and Senate reports to the effect that the legislation would freeze existing depreciation practices supports their construction of the statute.</p>
<p>The House Report for example noted that requirement that all for the later companies revert immediately to straight-line depreciation would place some regulated companies that a competitive disadvantage would result in wide spread rate increases.</p>
<p>Accordingly, the House Committee had determined “in general to freeze the current situation regarding methods of depreciation.”</p>
<p>The short answer to respondent’s contention on this freeze language is that the freeze language appeared first in the House Report and was largely copied by the Senate.</p>
<p>But the House Bill as everyone acknowledges had three general rules, so the “freeze” was obviously subject to the three general rules and as I have noted the third rule explicitly acknowledges that the legislation permits the abandonment of “flow-through” with the approval of the appropriate regulatory authority.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Thank you Mr. Huntington.</p>
<p>Mr. Boland.</p>
<p>Argument of Christopher T. Boland</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Mr. Chief Justice and may it please the Court.</p>
<p>The fundamental error in the court below in this case has to do with whether or not the election, which was provided by the Senate was in addition to the third rule of the House of Representatives or whether it was in substitution.</p>
<p>A careful reading of the opinion below and on rehearing was showed that this is where the Court fell in what we claim to be error.</p>
<p>The position of the respondents in this case is that it’s a substitution in their supporting court below.</p>
<p>Our position is that it’s clear an additional method provided to the taxpayer.</p>
<p>We think that shown very clear in the Senate Report in this connection we’ve set forth the entire legislative history with respect to Section 441 of tax [voice overlap].</p>
<!-- unk--><p><b> Unknown Speaker</b>: What was the -- that congress is concerned that stimulated this whole change?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: It isn’t express in terms, but it’s our feeling that Congress had some concern as to whether the regulatory agencies would permit a change within the discretion of the agency would permit a shift.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Why did Congress feel that the existing situation as administered by the agency needed some statutory provision?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Well, this is clearly established in the reports of both Houses, Your Honor that they were concerned about the gradual shift and trend to “flow-through” by companies that were not on “flow-through.”</p>
<p>The biggest of which was the telephone company, they were on straight-line depreciation of the Federal Communications Commission was threatening to impute “flow-through” for regulatory purposes on the tax consequences such an Act would be staggering.</p>
<p>They were really about the loss of tax revenues and in the report it shows that they had not intended really in passing the provisions of liberalized depreciation in 1954 Code to have these benefits passed on to the consumer.</p>
<p>It was intended to give the utilities working capital in order to invest a new plant.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Well, why though -- what and why then wouldn’t congress is simply force everyone off of “flow-through” for all as well as new property?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Well, and this suggestion was made Your Honor by the then chairman of the Federal Power Commission Chairman White and in the report it shows that the congress is turning that down because of the objection of several of the agencies where a competitive situations would put the utility at a competitive disadvantage.</p>
<p>They were also concerned about the fact that this would be mandatory and would create widespread rate increases, all utilities.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: It would -- if existing properties were suddenly put on the straight-line or normalization, there would necessarily be rate increases, is that it?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Yes, Your Honor.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: And do you think that is what was on Congress’ mind?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: I think the report is clearly established that.</p>
<p>They make it pretty clear that they were concerned and specifically --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: But they weren’t concerned enough to do anything but give the -- but give an option?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: But they had a dilemma so to speak.</p>
<p>On the one hand they were --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Well, I know but the -- an agency that have been requiring or looking for its “flow-through”, what would they do about existing properties?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Well, they were leaving it to the discretion of the regulatory agencies individually.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Well, where are the views of these regulatory agencies were pretty clear with?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Well, no Your Honor.</p>
<p>Some of them were the Federal Power Commission position was fairly clear.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Yes, that’s this case.</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: That’s this case, but the legislative history shows that the State Commissions were about equally divided between “flow-through” and normalization.</p>
<p>And as circumstances might change for example, here we’re confronted the natural gas industry, this Court knows fully well that if we got a gas shortage, you just had Louisiana Power and Light case here.</p>
<p>And this is one of the fundamental premises that the Commission had when they originally directed “flow-through” in the Alabama-Tennessee case.</p>
<p>They anticipated the continued expansion of the gas industry and with recognition the gas reserves were here the less beyond the year 2000.</p>
<p>Well, here we are short of 1973 and the very premise that the Federal Power Commission had anticipated this falling by the waste time yet under the decision, the court below, we would be forever barred from changing from “flow-through”, notwithstanding the change in the fundamental principle and concept -- the basic premises of Federal Power Commission.</p>
<p>But, it is clearly shown that the suggestion had been made to make it mandatory that no utility could use liberalized appreciation from this point forward and they turned that down because of what it might do competitively.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: And the rates?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: And the widespread rate increase.</p>
<p>It would be automatic.</p>
<p>All utilities involved would have to increase their rates.</p>
<p>Now that there might be some unique situations like Texas Gas where Texas Gas had a rate increase on file where we had requested within the discretion of the Federal Power Commission to go to straight-line depreciation.</p>
<p>The tax consequences the rate level to the consumers is exactly the same as normalization.</p>
<p>As a matter of fact under the Commission’s decision is little lower because they deduct the reserve from the rate basely, you do get a lower rate.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: Section 441 does it by its terms address itself to the utilities rate base, does it?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: No, not except in one respect, they do make a comment that they do not intend to preclude the agency’s discretion from deducting the reserve under normalization from the rate base.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: Well, does the rate base question necessarily go the same way that tax liability question goes in?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: No, in the strict sentence, the rate basis the plant invested utility whereas here we are talking about an item of costs of service and expense, which is part of cost of service.</p>
<p>The tax expenses included in the cost of service.</p>
<p>The only item in cost of service that directly relates the rate base is return.</p>
<p>I suppose depreciation, but depreciation is also relates to rate basis.</p>
<p>But other than an that you got operating maintenance expenses, you got federal income taxes, state taxes, ad valorem taxes, which goes to totality of the cost-of-service when which the rate is based.</p>
<p>But if you were turn to page 82 and 83 of our main brief for where set that the legislative history of this entire act and if you look at the lower portion of page 82, this is the key to the whole decision of the court below.</p>
<p>Both the House Bill and the committee -- this is Senate report --</p>
<!-- unk--><p><b> Unknown Speaker</b>: What of the brief reading?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: I'm reading from page 82 of your main brief -- the white brief which is part of our appendix and at the bottom, the last paragraph on the bottom and this is the Senate report.</p>
<p>Senate report is here making clear both the House bill and the Committee amendments, that is the Senate Committee Amendment that they’re sponsoring provide that in the case of existing property, the following rules are to apply -- the following rules to be apply.</p>
<p>The third rule is shown on page 83, if a tax payer is taking accelerated depreciation and “flow-through” to its customers, the benefits of the deferred taxes and the taxpayer would continue to do so wherein except this provide under the Committee Amendments which are discussed below close for in, unless, the appropriate regulatory agency permits the change as to that property.</p>
<!-- unk--><p><b> Unknown Speaker</b>: Is this address to the (Inaudible)?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Yes.</p>
<p>What the respondents would do Your Honor, is have as just right that out of the report.</p>
<p>They ignore it.</p>
<p>They attempt to make no explanation as to what happened to that language?</p>
<p>Here is firm clear language, the Senate to say and this is identical except for the parenthetical to the third rule in the House as to which the court below said that if the House bill have been passed, the Commission and Texas Gas wouldn’t been clearly justified in doing what was done.</p>
<p>But here in the Senate Report is precisely the same provision and they present from it, they disregard it as so it isn’t there and somehow the election that was provided by the Senate is suppose to expunge this from the report.</p>
<p>But we don’t see it expunge.</p>
<p>It’s right there in black and white.</p>
<p>Now, the parenthetical, you might ask, what does the parenthetical refer to?</p>
<p>The parenthetical refers to the fact and as you will see if you follow on page 84, they’re referring to one principal difference.</p>
<p>The committee amendments while in most respects the same as the House provision differ in one principal area.</p>
<p>The amendments permit an election to be made within 180 days.</p>
<p>So, it seems to be perfectly obvious that when they came out to the House, the third rule was there, they all agree with the third rule.</p>
<p>The court below said had that been the law, we would’ve been [Voice Overlap].</p>
<!-- unk--><p><b> Unknown Speaker</b>: Did you need the consent of the Commission under the third rule?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Oh, yes, under the third rule, you need the consent of the Commission.</p>
<!-- unk--><p><b> Unknown Speaker</b>: I know, but not under that language?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Oh, yes, sir.</p>
<p>Yes, sir.</p>
<!-- unk--><p><b> Unknown Speaker</b>: Well, not on the language would read me.</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Are you on page 83?</p>
<!-- unk--><p><b> Unknown Speaker</b>: I'm page 82.</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: 82?</p>
<p>Well, if you go over to 83, the third rule is at the top of the page on 83.</p>
<p>It’s right up in 173.</p>
<p>Now, if you look at the last part of that it says, “Unless the appropriate regulatory agency permits a change as to that property.”</p>
<p>In other words, somebody was on “flow-through” like Texas Gas was that we would continue on “flow-through” under the third rule, unless the appropriate regulatory agency permits the changes for that property.</p>
<p>And that’s exactly what’s happened here, the Federal Power Commission has permitted the change and this is precisely the same language is in the House.</p>
<p>Again, and I reemphasize that the court below said, that under the House language, this rule would have --</p>
<!-- unk--><p><b> Unknown Speaker</b>: Where is the language that requires the Commission to give its consent?</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: At the tail-end of the third rule on page 83.</p>
<p>It says, unless the appropriate regulatory agency permits the change as to that property.</p>
<!-- unk--><p><b> Unknown Speaker</b>: But it wasn’t require to give to --</p>
<!-- Christopher_T_Boland--><p><b>Mr. Christopher T. Boland</b>: Oh no, no it was not required, but this is the discretion.</p>
<p>The whole argument before this Court is, did the election submerge, obliterate the discretion which the Federal Power Commission had thereto for clearly had under all of the court decisions to decide what method of tax depreciation should be use for cost of services and rates.</p>
<p>And we say that under this language in the Senate Report that the House version survive the election, it’s a separate thing, it’s not an absolute right as the election is.</p>
<p>It needs that permission of the Commission, it was granted in this case and we submit properly so.</p>
<p>My time is up, thank you.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Thank you Mr. Boland.</p>
<p>Mr. Morrow.</p>
<p>Argument of George E. Morrow</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: May it please -- Mr. Chief Justice and may it please the Court.</p>
<p>I agree with the -- with counsel for the Government, Mr. Huntington that the issues in this case arise primarily under the Tax Reform Act of 1969.</p>
<p>The question that the Court of -- the Commission has found that that Act required one result.</p>
<p>The Court of Appeals has found that the Act required another result.</p>
<p>Really, the question in this case is which of those two results is in conformity with the purpose and intent of Congress in enacting the Tax Reform Act of 1969?</p>
<p>Specifically, was it the intent and purpose of Congress in enacting that Act to bring about a drastic and immediate change in the depreciation practices of most of the utilities in this country?</p>
<p>A change which would result in prompt, substantial, widespread rate increases.</p>
<p>The Court of Appeals, the result reached by the Court of Appeals is that this was not the intent of Congress.</p>
<p>The result of the Court of Appeals allows the utilities to take normalize depreciation with respect to their expansion property, but it leaves the rest of the property exactly the way it was before with the same tax practices in effect as before.</p>
<p>This is precisely what Congress intended, you can see that from that phase of the act and even more clearly it appears in the legislative history of the Act.</p>
<p>First, the Act itself specifically provides as counsel has pointed out for the election with respect to post 1969 expansion property.</p>
<p>But let me pause right here to point out that the Act very narrowly defines post 1969 expansion property.</p>
<p>It is only that property acquired after 1969, which does not replace existing property and which increases the operating of productive capacity of the utility.</p>
<p>Now, in the case of the pipeline industry, that means that this expansion property starting at flat zero in 1970 will grow and because of the gas shortage which is mentioned by counsel, this expansion property will probably grow very slowly.</p>
<p>So, the election with respect to expansion property will have very little practical tax effect or rate effect for a long time in the future.</p>
<p>If that’s what’s been lax on by the Commission, it’s a very stubby tail to wag a very large dog.</p>
<p>The Tax Act also expressly provides for the retention of “flow-through” depreciation with respect to property to companies that have been using it on the past.</p>
<p>It twice with respect of pre-1969 and with respect -- I mean pre-1970 and post 1969 properties specially provides the companies that have been “flowing through” may continue to “flow-through.”</p>
<p>The Court of Appeals reached exactly the same result.</p>
<p>Now, the legislative history makes it clear that this was all that Congress intended to do, this and nothing else.</p>
<p>I think I'm agreeing with my brothers on the other side concerning the reason for the passage of this Act.</p>
<p>The Utility Commissions over the country have been trending toward “flow-through” requiring their utilities to go to “flow-through” because this was the way that you minimize utility rates.</p>
<p>You made the companies pay -- charge their rates on the same basis that they paid their taxes.</p>
<p>You didn’t give them any fictitious tax in there like normalization does.</p>
<p>The only thing wrong with this from the treasury’s point of view was that as Mr. Huntington said, it also reduces the taxes paid by the companies.</p>
<p>And the Committee had found that it would soon result in loss of a billion dollars-and-a-half to maybe $2 billion to the Federal Treasury.</p>
<p>What to about that loss?</p>
<p>The solution is proposed to the House was to freeze current tax situation -- current depreciation practices right where they were.</p>
<p>The trend to us toward “flow-through”, freeze it.</p>
<p>Stop it right there, and that was all they proposed to do.</p>
<p>They did not propose to reverse the river but just to freeze it right where it was.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: What about the language on page 83 that your friend was discussing a bit ago?</p>
<p>If the taxpayers taking accelerated depreciation and a “flowing through” or the mission, then the tax payer would continue to do so unless the FPC --</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Permits the change as to that property?</p>
<p>Or it says the right that the appropriate regulatory agency?</p>
<p>Your Honor, there might be some circumstances under which a regulatory agency should take a utility all for “flow-through” and put it on to some other kind of depreciation.</p>
<p>“Flow-through” depreciation works -- the principle works when a utility is in and expanding or stable condition as long as its plant is expanding a stable to “flow-through” proposition works.</p>
<p>If a plant were winding down, then it would be appropriate for the regulatory Commission to take it all “flow-through.”</p>
<p>So, there are circumstances and which the Regulatory Commission should do that.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Well, isn’t that exactly what this tells us? Did you seem to suggest some doubt about what regulatory agency it would be?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Well, I'm just saying that this applies not only to Federal Power Commission, but it applies to all the regulatory [Voice Overlap].</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: No doubt that it similarly means Federal Power [voice overlap].</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Oh, yes sir, yes sir it includes that.</p>
<p>But the Federal Power Commission and the Court of Appeals recognized that there might be circumstances under which a change from “flow-through” would be justified and I think that’s all that the -- this reference has do with it.</p>
<p>As a matter of fact, on the face of the Act itself, there is no such provision about a regulatory agency permitting the change.</p>
<p>You don’t find that in the Act, that’s just a comment on the part of the people who were working on the Act.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: But any change from the “flow-through” would of course be beneficial from the point of view of Congress’ concern at the time of the 1969 Act because it would serve to increase taxes?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: But, yes Your Honor.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Because it would be change either the normalization or to start a straight-line?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: But Your Honor, Congress have two concerns of equal value to it at that time.</p>
<p>One of the concerns was that we stopped the trend to flow-through.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Right.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: The other concern was that we do it without creating widespread prompt substantial rate -- utility rate increase.</p>
<p>Now, this --</p>
<!-- unk--><p><b> Unknown Speaker</b>: [voice overlap] The Commission had no power to that -- to permit a change?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: We believe that it had no discretion to do what it did in this case, Your Honor, that’s right.</p>
<!-- unk--><p><b> Unknown Speaker</b>: Yes and that rule three, it seems to say that it does had discretion --</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Not under the circumstances of the State.</p>
<!-- unk--><p><b> Unknown Speaker</b>: -- then you must say, you must say then that this piece of legislative history, this must be disregarded in terms to the plain language of the Act?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: No, Your Honor.</p>
<p>I don’t say that, I say that that piece of legislative history has its place under a proper fact situation but this is not the fact situation.</p>
<!-- unk--><p><b> Unknown Speaker</b>: Then are we e reviewing the discretion of the Commission?</p>
<p>I thought [voice overlap] that was the power question.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Under the circumstances of this case, the Commission had no discretion to do what it did.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: But the Court of Appeals’ opinion isn’t -- wasn’t freeze in terms of a review of discretion at all as I read it.</p>
<p>It simply said categorically the Commission couldn’t do this but simply you are taking a little different.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, Your Honor.</p>
<p>And it said so on two bases.</p>
<p>First, on its reading of the Act itself and secondly, on the proposition that the Federal Power Commission has an absolute legal duty to allow in cost of service nothing more than actual taxes -- the real tax expense.</p>
<p>And this we say is the principle that was violated by the Federal Power Commission in this case and that’s why the Commission is wrong.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: That so that and for the same reason in Rule 3 is wrong?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Your Honor, I'm not saying that Rule 3 is of course, it’s not wrong it’s the law.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: What if we put it another way, doesn’t Rule 3 apply in face of what you have just said?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: No, sir.</p>
<p>Thank you Mr. Justice Stewart.</p>
<p>It doesn’t because there are circumstances under which it might be proper for a Utility Commission to move a company of a “flow-through” and then --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Well then, again and we are here to just reviewing that the decision of the Commission is to whether the circumstances are proper in this case?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Your Honor, --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Is that what the issue is here?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: I believe that under the circumstances of this case, --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Perhaps you better tell us what the Commission wanted to do in this case.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Alright, here’s what the -- well, alright.</p>
<p>What the Commission wants to do in this case and may I say something before I get into that definite if you want to get to that.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Surely.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: But you see in the course of the legislation, the passage of the legislation through Congress, first, Chairman White of the Commission came up to Congress and said, we’d like to have it everything just put on straight-line depreciation.</p>
<p>The Congress turned down that request for the reason that in addition that the one mentioned by Mr. Boland for the reason that to put everybody on straight-line would result in prompt substantial widespread utility rate increases.</p>
<p>And Congress did not want prompt rate increases to come into effect and so they turned him down.</p>
<p>Now, Mr. Justice White, if the Commission should win this case under the Commission’s decision in this case we reached almost exactly the same situation that we would have reach under Chairman White’s suggestion.</p>
<p>The utilities would charge their rates on the basis of straight-line depreciation, but pay their taxes on the basis of accelerated depreciation.</p>
<p>And for right purposes, you would in a fact have straight-line depreciation.</p>
<p>It’s not quite the same but it’s almost the same and this is what Chairman White suggested and this is what they turned down.</p>
<p>Now, when they did that, they thought that they had accomplished their purpose without putting any rate -- in any law into effect which would cause rate increases in the utilities.</p>
<p>They said that the Bill would forestall the revenue loss which the continuation of existing trends would make almost inevitable.</p>
<p>And that it would do so “in a way which with very few exceptions will require no increase in utility rates because of the tax laws.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Isn’t one thing to say that the Tax Reform Act wasn’t going to cause rate increases and another thing to say that by its terms it prohibited Commission action which might have permitted rate increase?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Your Honor, I believe that it was the intent of Congress to accomplish the “freeze” and to accomplish it in such a way as to avoid rate increases.</p>
<p>I believe that the action of the Commission not only “unfreezes” but it drastically revolutionizes utility practices and does so in a way which causes rate increases.</p>
<p>In other words, the result reached by the Commission is precisely the opposite of the result which Congress saw.</p>
<p>Now, let me point this out, when the Bill got into the Senate, someone in the Senate suggested, let’s give the pipelines or the utility the power or election to change to away from -- to abolish “flow-through” depreciation with respect to all the properties.</p>
<p>Abolish “flow-through” with respect to all the properties.</p>
<p>Now, if that had happened, you would have almost exactly the same situation that you have under the Act as it was passed -- I mean under the Act that was construed by the Commission.</p>
<p>The Commission says, this little -- the election with respect to expansion property puts us in a position where for all practical purposes we got to allow the pipeline to go on and normalizes to all its properties.</p>
<p>We have no alternative, that’s the Commission’s position in this case.</p>
<p>We are force into it by the practicalities of the situation.</p>
<p>So what the Commission is saying that an election with respect to the expansion properties is tantamount for all practical purposes to an election with respect to all properties.</p>
<p>This is precisely what the Senate proposed to put in the Act and which the Congress turned down.</p>
<p>So, twice this matter was considered, twice the Congress turned it down.</p>
<p>The Commission has now reached the very result which Congress turned down.</p>
<p>Let me address myself to the reason why I think that the Commission does not have the discretion to do what it did.</p>
<p>First --</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Well, that gets us back then to a discussion of the discretion on that power.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Well --</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Or are you -- did you misspeak yourself?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: No, alright.</p>
<p>Let’s talk about in terms of the Commission’s power.</p>
<p>The Commission is under the duty as the court below said that to allow a tax cost in the cost of service which is no greater than actual taxes.</p>
<p>The Court says this, there’s nothing in the Tax Reform Act of 1969 which modifies the Commission’s duty under the Natural Gas Act to require regulated Utilities Companies such as Texas Gas to set rates which reflect actually expenditures with respect to such property -- the set rates which reflect actual expenditure.</p>
<p>Now, the Commission does not have discretion then to grant a utility, a tax allowance and its cost of service.</p>
<p>It doesn’t have power to grant a utility and allowance and its cost of service for taxes which are not paid.</p>
<p>In other words, it does not have the power to treat as a cost something which in fact is not a cost.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: That depends not in all on Section 441 either that party you’re arguing?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: That’s right Your Honor.</p>
<p>That is the law under the Natural Gas Act as the Court of Appeals held and as this Court held in United U.S. Pipeline versus FPC, which was a tax case and which Mr. Justice White is familiar with.</p>
<p>In that case, the Court said that the Commission have the power and the duty to limit the cost of service to real expenses.</p>
<p>Now, in this case, Texas Gas is normalization on its little tag of expansion property is not going to increase its depreciation, not under decrease it’s the depreciation by one dime.</p>
<p>Now or ever, it’s not going to increase its income taxes with respect to depreciation by one dime now or ever.</p>
<p>The only effect that it will have or to be put more money in Texas Gas’ pockets.</p>
<p>Texas Gas gets to charge a higher rate because of normalization with respect to this little piece of expansion property and it gets to pocket the difference.</p>
<p>And the Commission is in the position of saying that because Texas Gas gets increase revenues due -- with respect to its expansion property.</p>
<p>Therefore, in order to keep it even, in order to keep it whole it’s got to get increase revenues on a large scale with respect to its $600 million worth of depreciable rate base.</p>
<p>There is no increase in Texas Gas’ taxes as a result of it’s going to normalize depreciation on its expansion property.</p>
<p>Therefore, we say that the Commission had no power to give it an additional return or an additional amount in its cost of service to do this.</p>
<p>We say that if we do.</p>
<p>That if you do, you have accomplished precisely what Congress was attempting to avoid. Congress said, let’s freeze the situation and avoid tax rate increases.</p>
<p>The effect of the Commission’s decision is to unfreeze the situation and drastically change tax practices and do so at the cost of hundreds of millions of dollars of utility rate increases throughout the United States.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: In your response to Mr. Justice White then just what did you have in mind when you said that under some circumstances they would have discretion Commission without a discretion?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Your Honor, this is just an illustration.</p>
<p>The whole concept and I'm sure Your Honor knows because you are on the Panhandle case in the City of Chicago case.</p>
<p>The whole concept of normalized depreciation is that it works when the company is in an expanding condition or its depreciable base is at least stable, then the principle flow-through depreciation where your new properties coming in all set your old properties which are declining in value, that principle works.</p>
<p>It would not work with the pipeline which because of the gas shortage or whatever was winding down its activities.</p>
<p>And therefore, if a corporate -- if the tax utility or particular a pipeline were caught in the winding down condition where its depreciable property was actually decreasing, then this would not be applicable.</p>
<p>But let me point out that there is not one shred of evidence in this case.</p>
<p>Not a shred of evidence that Texas Gas’ property is going to be -- is going to wind down or decrease.</p>
<p>As a matter of fact there is the question of normalization was never even considered in the trial of this case.</p>
<p>Texas Gas didn’t ask for it when it filed its return, nobody put in any evidence on it.</p>
<p>There’s not a shred of evidence in this case about the effects of normalization on Texas Gas.</p>
<p>So, we say that what the Commission has done, is to -- Your Honor, I thought I was given a light if I overstepped my colleagues.</p>
<!-- unk--><p><b> Unknown Speaker</b>: You were given a red light.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Yes.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: I was going to be given a white light and I didn’t see it.</p>
<p>I hope I haven’t overstepped my colleagues’ time because I was supposed to leave.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: No, you did not, he has 10 minutes remaining but if you have something important, we’ll be flexible about this and enlarge your friends’ time accordingly if he needs it.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Thank you Your Honor.</p>
<p>I will just summarize by saying this.</p>
<p>That Congress had a specific problem in mind.</p>
<p>The problem was to avoid further tax losses is by stemming the flow toward “flow-through.”</p>
<p>It had two purposes in mind, the other one was to do so without causing utility rate increases.</p>
<p>The result reached by the Commission in this case causes enormous utility rate increases all over the country.</p>
<p>The result reached by the Court of Appeals causes no increases and exactly coincides with the intent and purpose of Congress.</p>
<p>Thank you.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Mr. Solomon.</p>
<p>Argument of Richard A. Solomon</p>
<!-- Richard_A_Solomon--><p><b>Mr. Richard A. Solomon</b>: Mr. Chief Justice and members of the Court.</p>
<p>There may be some confusion here as to what the issues in the case are.</p>
<p>There are two issues in this case and they would put into this case by the United States.</p>
<p>First issue was whether the Court of Appeals was correct in construing the Tax Act as precluding the Commission from considering the request by Texas Gas.</p>
<p>And the second issue is whether assuming the Commission as authority -- continuing authority to consider the question whether it considered it problem.</p>
<p>There’re two issues here.</p>
<p>They’ve been put into this case by the United States and they have been accepted us.</p>
<p>It is true and only one of them was decided by the court below that both parties to this proceeding are suggesting that you can decide the second issue if you reach that.</p>
<p>Now, I haven’t got enough time to spend much time on the basic decision of the court below.</p>
<p>But I do want to say one thing in response to Justice White.</p>
<p>The Court of Appeals did not believe that if the situation had been left as it was at the time of that Senate Report that Mr. Boland read that the Commission would’ve been precluded.</p>
<p>The Court of Appeals decision is based on the entire history of what happened and specifically based upon the limitation of the election by the conference.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And so that the report really doesn’t speak to the act is finally passed [voice overlap]?</p>
<!-- Richard_A_Solomon--><p><b>Mr. Richard A. Solomon</b>: The report speaks to the Senate Bill then before them, the conference limit it and the Court of Appeals thought that was significant and I think it’s significant but you have to look at my brief for that point because I would really if I had a limited time I have like to go on to the exercise of power assuming they had any power.</p>
<p>Now the United States hasn’t said very much about this.</p>
<p>They would like you to believe that discretion is the end of the argument that because an agency obviously has great deal of discretion in general to decide what the parameters of its ratemaking principles are.</p>
<p>But if they decide for “flow-through” that that’s all what has to be you have to worry about it.</p>
<p>But if there is one thing in this complex tax law, which is clear, if an agency chooses to fix the rights of a utility on the conventional cost of service basis it may include a tax allowance but that tax allowance is to be -- to the extent, it is possible to calculate it the actual taxes paid and not theoretical tax.</p>
<p>And when the Federal Power Commission and other agencies happen time to time attempted to include in the right of the company fictitious tax allowances.</p>
<p>They have been regularly smacked down by the court.</p>
<p>The problem with respect to liberalize depreciation is whether it’s used involves a tax deferral or a tax saving.</p>
<p>If it involves a tax deferral, then the actual taxes are not what to you pay in the particular year.</p>
<p>The tax incurred is a higher amount although you are allowed to defer a part of it.</p>
<p>And under such circumstances it would be appropriate to allow the normalization.</p>
<p>But the fact of a matter is that you do not pay taxes on the basis of the situation with respect to individual pieces of property or individual groups or property.</p>
<p>You pay taxes on the entire tax obligation of the regulated utility and from the depreciation standpoint under the depreciation status of the entire utility.</p>
<p>And this is what the Commission found in the Alabama-Tennessee case.</p>
<p>It means that with respect to growing or stable company, the lower taxes on the later on later vintages of property will be more than sufficient to counteract the higher taxes on earlier advantages of property with the result that you will have a constantly growing tax surplus.</p>
<p>Now, that’s what happened to Texas Gas, when it was allowed to normalize prior to 1967.</p>
<p>As a result, it comes in to this case with $13 million of reserve which nobody can claim is related to the all of the property.</p>
<p>It will as a result of the right given it by Congress the special right given it by Congress by Section 441 be entitle to accrue additional reserves which are in fact interest free loans.</p>
<p>And with respect to new expansion property, but the fact that is accruing additional interest free reserve has nothing whatsoever to do with whether or not Texas Gas use of liberalize depreciation on all property and new property, which is what’s being doing.</p>
<p>We’ll seize to be a tax saving, it was using liberalize depreciation on all its property and because it was a growing company it resulted in tax savings.</p>
<p>It will use liberalize depreciation in the future on all its property and if it is a growing and stable country -- company, it will still be a tax saving.</p>
<p>Now, what about this gas supply shortage and everything like that?</p>
<p>There are areas for commission expertise.</p>
<p>One area for commission expertise could be a finding based on evidence, substantial evidence but certainly one you some weight to, saying that the industry has changed and this company or other companies are not going to be growing companies?</p>
<p>And therefore, the factual situation is change.</p>
<p>If that was the posture in which this came to, then you obviously unless the Commission’s determination was clearly not based on the record would have a very difficult problem if you want to reverse it.</p>
<p>But that is not the problem the way this case comes to.</p>
<p>On the contrary, the Commission assumed, they more than assumed, they found an Order 578 that Texas Gas was going to continue to grow.</p>
<p>And I am citing from page 110 of the record about two lines, three lines below, the numeral 27, 47.</p>
<p>And here’s what say, said the Commission this isn’t me, “While Texas Gas is pre-1970 properties may represent a declining net investment.</p>
<p>The company will undoubtedly be adding its entire rate base by not post-1969 construction.”</p>
<p>They didn’t find that gas supply shortage or any thing else had changed the situation which met this was a tax savings rather tax deferral.</p>
<p>What they found was that because the Commission now has the right -- pardon me, because Texas Gas now has the right to keep a portion of the tax savings i.e. the increasing amount of their new expansion property that that somehow converted the situation from a tax saving to a tax deferral.</p>
<p>But we submit to you that there is nothing in the Act, nothing in the Commission’s rule and nothing in common sense which says, that because a company has the temporary use of an interest free loan that means that it’s use of liberalize depreciation is going to become a tax deferral rather than a tax saving.</p>
<p>It only means that if at some unforeseen, an unexpected and certainly not found on this record future date.</p>
<p>There were some need for use of this fine and over and beyond that the $13 million they already have for use.</p>
<p>If only millions that there are be additional ways of meeting this possible but not found future contingency.</p>
<p>So, our basic position in this case assuming that the court below was wrong in saying that the Commission was precluded from considering this request is that its resolution of the matter was in error.</p>
<p>And if you will read the Commission’s decision, you will find that it’s so reasonably for finding there is no tax saving is this assumption that because all of the facts savings will be put into this fund.</p>
<p>They are not available and have to be available in the first place and in the second place if there was necessary, they could be made available.</p>
<p>And the only I think I’d like to say is Mr. Huntington says that normalization has to be put into a reserve fund.</p>
<p>We will grant that although the House Report suggests that isn’t true.</p>
<p>But, there is nothing in the -- there aren’t anything else that says, what it goes into a fund it can’t be use for future use.</p>
<p>That’s what deferred taxes are for.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Mr. Huntington.</p>
<p>Rebuttal of Samuel Huntington</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: I’d like to talk first about the power issue and then I have few remarks to say about the Commission’s exercise of discretion in this case.</p>
<p>When Mr. Morrow conceded that there maybe certain circumstances under which the Commission could permit and abandonment of “flow-through” with respect to existing property, I think he conceded this point.</p>
<p>That is precisely our position and it’s a matter of Commission discretion that this is what the third rule in the House provided.</p>
<p>It left this type of thing up to the Commission.</p>
<p>The only thing the election provision here was to give the companies an absolute right without getting regulatory agency approval to get off “flow-through.”</p>
<p>Now, the language in the Senate Report is pertinent because it was the Senate that added the election provision.</p>
<p>And the language in the report shows that in adding it, it did not mean to displace the third rule.</p>
<!-- unk--><p><b> Unknown Speaker</b>: Have you presented this argument to the Court of Appeals on rehearing or [Voice Overlap].</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: Yes, the power.</p>
<p>Yes, I’m sure.</p>
<p>We argued to the court --</p>
<!-- unk--><p><b> Unknown Speaker</b>: Have the Court of Appeals there’s specifically thought that the conference had run around this [Voice Overlap]?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: The Court of Appeals stressed certain language in the Conference Report which I don’t think I will go in to here.</p>
<p>But it is we do come to grips with that issue rather squarely in our brief and we think there’s just a total misreading of the Conference Report and that we must rely on the Senate Report and that in merely narrowing the election from existing property to expansion property that conference certainly did not mean to negate the general rule referred to in to a House and the Senate Report.</p>
<p>I’d like to now to turn to the -- assuming that the Commission has the power, was it properly exercised in this case.</p>
<p>Now, both respondents here and in their briefs talk about the actual taxes doctrine while the actual taxes doctrine has never been thought or never been held to preclude the Commission from exercising its discrimination in how to treat liberalized tax depreciation for ratemaking purposes.</p>
<p>It is largely a question of whether the taxes result in a -- whether the use of liberalize depreciation results in a tax deferral or a tax savings.</p>
<p>Now, if we could consider all of Texas Gas property together, then we would have a different case than we have here.</p>
<p>Then you would continue assuming that Texas Gas continued to expand, you would have -- you would have -- you would be able to use the benefits from the expansion property with respect to the old property.</p>
<p>But Congress made the segregation.</p>
<p>Congress said, “With respect to expansion property, you can get off “flow-through”, you can go to straight-line and if you can get the agencies approval, you can go to normalization.”</p>
<p>So, Congress segregated these types of properties.</p>
<p>So you cannot consider the tax benefits from the expansion property in determining what method of accounting to apply to the existing property for ratemaking purposes.</p>
<p>The whole concept of normalization is that you take the benefits and you put them into a reserve account. They are not available for anything else.</p>
<p>They are in that account so that you can pay future taxes with respect to that property.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: Well, you say you put them in a particular account, is that to know an actual deposit of funds?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: No, it’s a --</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: It’s an accounting?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: It’s an accounting thing, but you cannot.</p>
<p>Those funds are not available --</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: They’re not funds.</p>
<p>If you are to use them but accounting entries.</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: Well, as far -- in other words, the company is required to maintain an account of sufficient size to pay future taxes with respect to that property.</p>
<p>The -- as far as paying --</p>
<!-- unk--><p><b> Unknown Speaker</b>: When you collected that, do you think it’s an actual money in the sense you collected it from --</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: You collected it from the --</p>
<!-- unk--><p><b> Unknown Speaker</b>: You collected it from somebody?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: That’s right.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: And for ratemaking purposes that it would be treated what that to the same way as depreciation or a service of other kind, how would it be treated?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: Well, for ratemaking purpose the amount is deducted from the rate base so that it is essentially [voice overlap] --</p>
<!-- unk--><p><b> Unknown Speaker</b>: Well, I know but it’s treated as a tax expense that you [Voice Overlap].</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: For ratemaking purposes the --</p>
<!-- unk--><p><b> Unknown Speaker</b>: Treated as an expenses if you have -- as taxes that you actually paid --</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: As you actually paid and you haven’t paid --</p>
<!-- unk--><p><b> Unknown Speaker</b>: -- and you haven’t paid.</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: That’s right.</p>
<p>But because Congress specifically said, alright, you can use this method on expansion property.</p>
<p>It is Congress that has made the segregation and therefore you have to look just at the existing property in determining what method to use there.</p>
<p>And there we say the Commission was correct in determining that the use of “flow-through” was no longer appropriate and had full discretion this is a matter completely within the Commission’s discretion to analyze these facts and make it --</p>
<!-- unk--><p><b> Unknown Speaker</b>: So far within the discussion of the Commission, it doesn’t like to say why it did it?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: It said why I did it.</p>
<!-- unk--><p><b> Unknown Speaker</b>: Well, why did it?</p>
<!-- Samuel_Huntington--><p><b>Mr. Samuel Huntington</b>: It did it because with respect to existing property, there were no longer be sufficient deductions to offset the declining balances on the existing property from year to year, the tax depreciation deductions would decline.</p>
<p>Therefore, instead of having a tax savings with respect to that property is merely a tax deferral to pass it on in the form of lower rates now would simply mean, that present customers are paying a tax expense which the or getting a tax benefit at the expense of future customers who would then have to pay the increase taxes.</p>
<p>Thank you.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Thank you.</p>
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Thu, 23 Aug 2012 18:24:32 +000063032 at http://www.oyez.orgFPC v. Louisiana Power & Light Co. - Oral Argumenthttp://www.oyez.org/cases/1970-1979/1971/1971_71_1016/argument
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Case:&nbsp;</div>
<a href="/cases/1970-1979/1971/1971_71_1016">FPC v. Louisiana Power &amp; Light Co.</a> </div>
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Transcript:&nbsp;</div>
<p>Argument of Gordon Gooch</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: We will hear arguments next in 71-1016, Federal Power Commission v. Louisiana Lights and Powers, and 71-1040, United Gas Pipe Line against Louisiana Light and Power, consolidated cases.</p>
<p>Mr. Gooch, you may proceed whenever you are ready.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Mr. Chief Justice, may it please the court.</p>
<p>This case presents two basic issues, the first is the issue of whether the Federal Power Commission has jurisdiction to protect the interstate consumers of natural gas transported in interstate commerce, regardless of whether the ultimate customer of that gas is a customer, the distribution company or a direct purchaser from the pipeline.</p>
<p>The second issue is whether or not --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: State that first one again.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes, sir, whether the Federal Power Commission has jurisdiction under Section 1 (b) of the Natural Gas Act, and sections 4, 5 and 16 to regulate the curtailments of service of gas transported in interstate commerce by interstate pipelines, regardless of whether the customer is a customer of a distribution company, or a direct purchaser from the pipeline.</p>
<p>The second issue is whether the Fifth Circuit properly found that the Federal Power Commission did not have jurisdiction over certain facilities when the Federal Power Commission subsequently has found that they did have jurisdiction over those facilities due to the injection of substantial quantities of interstate gas.</p>
<p>The case arose when Louisiana Power and Light filed suit in the District Court in Louisiana seeking to enjoin United Gas Pipe Line, from implementing any curtailment program which would result in the reduction of gas delivered to two of their generating plants.</p>
<p>At the time, the suit was instituted, two separate proceedings were pending before the Federal Power Commission.</p>
<p>The first proceeding, a curtailment proceeding was to determine the Federal Power Commission's jurisdiction to allocate the suppliers of Interstate Natural Gas pipelines.</p>
<p>When their gas supplies were so depleted that they were unable to meet the contracts of all of their consumers in all states served by the pipeline, directly or indirectly.</p>
<p>And a second proceeding was pending to determine the jurisdictional status of certain facilities that are part of the United Gas Pipe Line system, that and part of the time in the past had been operated in intrastate commerce with a separate system of supply, but subsequently quantities of interstate gas had been injected into the former intrastate system.</p>
<p>And the question presented was whether or not those facilities, therefore were subject to federal and not state jurisdiction.</p>
<p>The Louisiana Power and Light company obtained a temporary restraining order ordering United to make their full deliveries without curtailment.</p>
<p>On LP&L's claim that domestic customers did not need the gas, that was ordered curtailed.</p>
<p>In time sequence now, and I'll skip some procedural matters, in time sequence, the Federal Power Commission then held in the curtailment proceeding that under section 1 (b) of the Natural Gas Act, Sections 4 and 5 the decisions of this Court in the Transco case and Panhandle in 332 U.S, that the Federal Power Commission had plenary jurisdiction under its transportation authority, over gas dedicated to interstate commerce and being transported in interstate commerce, and had the power to curtail, any and all customers of a pipeline in order to be sure that a fair allocation of gas supplies would be available to all interstate consumers.</p>
<p>Next, in time sequence, the Fifth Circuit held that the Federal Power Commission had no jurisdiction to order curtailments of deliveries of gas dedicated to interstate commerce, transported in interstate commerce but delivered to direct industrial consumers as distinguished from deliveries to distribution companies for ultimate resale to public, citizens, and industries.</p>
<p>Subsequently --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: It held that the Commission had the power neither under 1 (b) 4 and 5, nor under Section 7 or 8.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Sir, it appeared to me that the Fifth Circuit held that under Section 7 (b) the Commission could have an abandonment proceedings and order the direct industrials completely out of an interstate pipeline.</p>
<p>The Fifth Circuit said between the initial certification under Section 7 --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Oh yes, but they held that they cannot have a curtailment proceeding?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: That's correct, sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Under section 7.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: No, sir they didn't really approach that, they only said that to the extent that the Federal Power Commission has any jurisdiction, it's under Section 7, and that would be limited to the initial certification or the abandonment, but nothing in between.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Yes.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: And the curtailment proceedings are handled under Section 4 and 5 and 16, not under Section 7.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, I know but wasn't one of the claims before the Fifth Circuit that there could be a curtailment sort of abandonment under Section 7?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes, sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And they rejected that?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: I can't say that, sir.</p>
<p>I think that they would permit an abandonment proceeding, that would have a result of reducing permanently the services to a direct industrial customer.</p>
<p>I don't think there is any question of Fifth Circuit that curtailments could be handled, that is to say abandonments of service could be handled under Section 7, that wasn't an issue.</p>
<p>The issue was whether or not it could be handled under Sections 4, 5, and 16.</p>
<p>The Fifth Circuit went on to hold that the Federal Power Commission could not exercise jurisdiction over the former intrastate facilities because in the Fifth Circuit's view the quantities of gas injected in to that system were de minimis, and there was a possibility that another affiliate of the pipeline could have put the same quantities of gas into the system that were interstate gas.</p>
<p>In the Federal Power Commission's opinion subsequently issued, the Commission found that the gas being injected into the system was substantial.</p>
<p>In fact made 67% of the peak day deliveries for the New Orleans' system, and found that the affiliate of the United Gas Pipe Line did not have sufficient quantities or deliverability basis to make up the difference and that the interstate gas was needed in order to maintain the peak day viability of the formally intrastate system.</p>
<p>Now both Commission decisions, both deciding its authority under curtailments, and also deciding its authority over the Green System as it's called are now pending before the Fifth Circuit for decision.</p>
<p>The Commission through the Solicitor General requested certiorari because if the Fifth Circuit's decision is correct, and the Federal Power Commission has no jurisdiction over gas transported in interstate commerce, except as an initial certifying matter or except at the conclusion of an abandonment proceedings after the individual customer is being compelled to abandon.</p>
<p>Then the Federal Power Commission is powerless to prevent the interstate consumers of Natural Gas, the domestic consumers, the homes, the schools, or hospitals from being certain that they have a chance for their fair share of a scarce gas supply when the pipelines are unable to meet all other contracts.</p>
<p>Now LP&L has put a question that the Louisiana Commission is better able to determine the public interest of Louisiana citizens for the use of gas supply than the Federal Power Commission, and they argued that the elected officials of the state of Louisiana would be more likely to protect the interest of Louisiana citizens than with the Federal Power Commission, we don't argue that point.</p>
<p>Our point is that it is our responsibility as we read the Natural Gas Act and the decisions of this Court under it. It is our responsibility to protect the gas supply of all consumers in all states served by the interstate pipeline, and in this case, gas from United gets us far away as Boston, because they resale the Texas gas, Texas Eastern, Transco, Southern Natural, and that gas then is transported not only in interstate commerce by United but by other pipelines throughout the Eastern portion of the United States.</p>
<p>And if the Federal Power Commission has no authority to curtail or divert the volumes that are dedicated to industrial consumers in the state of production or in any other state, then the Commission has no authority either to prohibit undue preferences or discriminations under Section 4, which is a clear ground of authority to the Commission, nor any action under Section 5 or 16 of the Gas Act.</p>
<p>Now section 1 (b) of the Natural Gas Act from which our authority derives states clearly that we have three alternate, basis independent responsibility jurisdiction.</p>
<p>The first is jurisdiction over transportation of gas in interstate commerce.</p>
<p>The second is over sales for resale of gas in interstate commerce.</p>
<p>And the third is over the Natural Gas companies themselves.</p>
<p>And this court in the East Ohio case in 338 US and in the Panhandle case 332 US has clearly set out those as independent grounds of the Federal Power Commission's jurisdiction.</p>
<p>And in two cases, the Panhandle 332 and in Transco 365, this Court has specifically recognized that when curtailments are necessary, that curtailments and interruption of service are matter that relates to transportation and therefore within the jurisdiction of the Federal Power Commission to control, and allocating the competing demands among the several states.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Transco was an initial certification proceeding?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes sir.</p>
<p>In the Transco case, in recognition, the court recognized the types of authority that the Federal Power Commission had -- both the Panhandle case and and the Transco were not curtailment cases, that is to say where the issue is presented, but in both of those cases, the Court recognized that in a matter of allocating gas supply among the several states, that it was the type of authority that was granted to this Commission and --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Would United have to get to consent of the Federal Power Commission to curtail transportation to LP&L?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Under what section?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: -- they would have to -- assuming the contract [Voice Overlap]</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Let's assume there was no contract --</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: No contract at all.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: They have just been selling gas to LP&L over a long period of time, and they suddenly decided they want to sell it all to, to transport it farther East.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: No sir, they could do not do that.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Will they have to get consent?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Under what section?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: The Federal Power Commission has ordered all pipelines that are unable to meet all their contracts, direct or indirect filed under Section 4.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: I know they have ordered but that's sort of assuming the answer to this case, isn't it?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Well sir, it seems to me that the Federal Power Commission has three choices.</p>
<p>The Federal Power Commission may proceed under Section 4 and 5 as one choice.</p>
<p>The Federal Power Commission may proceed under Section 7 and order abandonment if it so chooses.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Or forbid it?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Or forbid it, well it's not necessary -- yes sir, that's correct.</p>
<p>And the third is under Section 16 or otherwise as we had a rule making, 405 which considered the possibility of adopting regulations nationwide that would handle this problem so that it wouldn't run the risk of householders having --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Would United have to get consent from the Federal Power Commission if it cut down its deliveries to its domestic, to the utilities for the resale?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: So one way or another, if they can't satisfy both direct users then the utility customers are going to have to --</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Somebody is going to be curtailed.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Somebody is going to have to go to the Commission?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: One way or the other?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes sir, but the Fifth Circuit has held that the direct customers do not come to the Commission, they are free to sue for their full contract quantities in Court and then it's up to the Court to determine who had to allocate the gas and decide who gets the gas.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, there are some contract provisions on the contract sale under which United could curtail without coming in the Commission?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Well sir, the problem with that is there are some 300 and some odd contracts on United system that all the contract provisions are not the same.</p>
<p>And the extent to which you relied on contract rather than regulation to decide who gets interrupted.</p>
<p>You then have two problems, one a court assuming a State Court is handling and has the jurisdiction to affect gas in other states, that is to say divert it from an interstate stream to serve a local need.</p>
<p>He has got to determine if it has a domestic preference in it.</p>
<p>He is got to determine what all the domestic needs on the entire interstate system is, before he can do it and that's what the Commission does.</p>
<p>The court would have to do it too.</p>
<p>Secondly, in this very case on LP&L's sworn allegation, the District Court entered a temporary restraining order, saying that the domestic customers did not need the gas and therefore LP&L could not be interrupted.</p>
<p>So we run the risk of multiple litigation on contract by contract basis, with no one unless every distribution company and every customer participates.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: So a court could decide that United had to satisfy deliveries to LP&L and the Commission could refuse to give United the permission to cut down its gas deliveries to the utility resale.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: That's a possibility sir.</p>
<p>Basically what the Commission is doing --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Exactly the same circumstances.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: I think so, I am not sure I understood your question but --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, I mean to Commission and the courts could decide it differently?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Oh yes sir, no question about that.</p>
<p>And the other proposition is the Federal Power Commission is claiming the right to overwrite the contracts, no matter what they say.</p>
<p>So that a rational system of interstate priorities can be setup, so that the interstate customers will not have their gas diverted at the basis of a state regulatory commission, or state, or other court and instead there will be an interstate, regulation of an interstate gas trade.</p>
<!-- Harry_A_Blackmun--><p><b>Justice Harry A. Blackmun</b>: May I ask Mr. Gooch, this gets back back to a question Mr. Justice White asked you earlier.</p>
<p>You said that you did not think that the issue, the Section 7 issue, jurisdictional issue had been decided by the Fifth Circuit?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: No sir, I don't mean to say that -- I don't think there is any question in the Fifth Circuit's decision that the Commission could proceed by way of abandonment and knock a direct industry or any other customer of an interstate pipeline, I don't think --</p>
<!-- Harry_A_Blackmun--><p><b>Justice Harry A. Blackmun</b>: What does this mean in 17A?</p>
<p>The issue is does the FPC have the authority to modify condition or certificate issued for facilities used to make a direct sale, or briefly stated does the Commission have continuing certificate jurisdiction.</p>
<p>FPC asserts that it does and that it needs to have this jurisdiction to make effective what it conceives to be the full extent of its regulatory powers, we deny this assertion.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: We didn't claim that sir, we weren't claiming that we had a modification of the certificate, what we were saying was that under Section 4 and 5 of the Natural Gas Act, that says that the Commission has certain powers among of which is to prevent discrimination against any person, that we have the power to overwrite the contracts that were behind those certificates.</p>
<!-- Harry_A_Blackmun--><p><b>Justice Harry A. Blackmun</b>: Are you saying then that to do what you are doing in this case, you could not operate under Section 7?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: No sir, we could not because until the end of a lengthy proceeding, I don't know who would determine where the interstate gas supply would go, that would depend on who got to the courthouse first, or who was closer to the interstate source and --</p>
<!-- Harry_A_Blackmun--><p><b>Justice Harry A. Blackmun</b>: If that have to be done on an individual by point company basis?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes sir.</p>
<!-- Harry_A_Blackmun--><p><b>Justice Harry A. Blackmun</b>: And individual contract basis?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Not only individual contract but --</p>
<!-- Harry_A_Blackmun--><p><b>Justice Harry A. Blackmun</b>: But each individual pipelines?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes sir, it does because the Federal Power Commission has no jurisdiction whatsoever to order interstate pipelines to exchange gas among themselves.</p>
<p>Nor can we order gas from the intrastate market into the interstate market, nor can we order a producer to sell gas to the intrastate market.</p>
<p>May I have the remaining time for Mr. Harvin please?</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Very well Mr. Gooch.</p>
<p>Mr. Harvin.</p>
<p>Argument of William C. Harvin</p>
<!-- William_C_Harvin--><p><b>Mr. William C. Harvin</b>: Mr. Chief Justice, may it please the court.</p>
<p>While the question before the court is a limited one of the curtailment jurisdiction of the Federal Power Commission, the commission has graciously conceded five minutes of this presentation to United, its co-petitioner here to speak to a few of the practical aspects of this problem that we hope the Court will keep in its mind as it decides the question of FPC curtailment jurisdiction or not.</p>
<p>United is an interstate gas transmission system covering the states of Texas, Louisiana, Mississippi, Alabama, and Florida, and supplying some five other jurisdictional pipelines which in turn supply much of the gas, that's eventually consumed in the mid-west and in the east.</p>
<p>In addition to people such as Louisiana Power and Light and in addition to those other jurisdictional pipeline customers, we serve over 200 other direct industrial customers including some 14 different power plants such as Louisiana Power and Light.</p>
<p>We serve over 100 distribution companies that in turn supply gas to some 800 different communities.</p>
<p>And of extreme significance is the fact that some 37% of our volume is taken up in these direct industrial sales and this makes the decision of the Court of Appeals, excluding direct industrial sales from the curtailment jurisdiction of the Federal Power Commission, extremely important not only to United but to United's other customers as well, or it's undisputed that the total gas requirements of all of United's customers just cannot be met irrespective of what this court decides about whether the FPC has curtailment jurisdiction or not.</p>
<p>The electrical utilities and the other direct industrial customers all assert different theories about why they should have priority to get their full requirements, and they do so without regard to the impact or effect that these positions they are taking may have on the distribution companies and the domestic consumers along the length and the breadth or our system.</p>
<p>Well, if these conflicting interests are to be resolved in terms of a system wide shortage without effective regulation, the priorities will have to be based on such factors as who has the physical capacity by virtue of his geographical location close to the source of supply of United's gas, or who is able to get to the courthouse first and then join United's reduction of deliveries.</p>
<p>Gas beyond curtailed levels that's obtained by such means is simply going to be taken away from others of United's customers.</p>
<p>So we get right down to the question of who is going to determine the priorities to an interstate pipelines limited supplies of gas among a variety of customers in many, many states.</p>
<p>Well, reducing deliveries to industrial customers as maybe necessary to meet human needs or requirements, is basically a matter of interrupting service, not abandoning contracts.</p>
<p>And it calls for interruption of services all along the interstate pipeline system.</p>
<p>And this Court had announced on two occasions that interrupting service was a matter largely related to the transportation jurisdiction of the Federal Power Commission.</p>
<p>Thus within its jurisdiction, that was the procedure United followed to implement and seek FPC approval of a curtailment program.</p>
<p>A curtailment which had its impact on industrial sales.</p>
<p>It has thus far had no impact and foreseeably and hopefully will have no impact on domestic consumers.</p>
<p>The same is true with respect to the gas that's supplied to the power plants.</p>
<p>Their deliveries are reduced to the extent that they use gas for the generation of electricity for industrial consumption, but their human needs requirements are supplied without any reduction whatsoever.</p>
<p>Under FPC jurisdiction, we believe that this program of orderly reduction of deliveries can be handled in the public interest.</p>
<p>It can be handled uniformly, whether exceptional circumstances that apply to one customer, they can be viewed in light of the interests of all the customers.</p>
<p>State regulatory agencies for practical and legal purposes are not equipped to handle such problems of an interstate pipeline system and to allow it to be conducted by random litigation and conflicting Court decisions based upon different facts relating to different special interests in different states has put us in a complete state of chaos in the gas industry.</p>
<p>This is not to suggest that need creates federal power and the curtailment jurisdiction in the Federal Power Commission.</p>
<p>It is to suggest that since Congress specifically wanted to avoid any regulatory gap and since the job cannot be done at the local and the state level, that the logical place for it to be done is within the parameters of the Natural Gas Act by the Federal Power Commission.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Thank you Mr. Harvin.</p>
<p>Mr. Carter.</p>
<p>Argument of Andrew P. Carter</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: Mr. Chief Justice, may it please the Court.</p>
<p>LP&L's affirmative position in this case is that its contracts with United or direct sales contract, direct industrial sales contracts exempt under Section 1 (b) of the Act.</p>
<p>The Fifth Circuit has so held, that's the decision here on for review.</p>
<p>Now the FPC in order to scrape that holding is arguing that it has a plenary jurisdiction under what it terms its transportation authority, and it points to the first part of Section 1 (b) to say that that's where its transportation authority resides.</p>
<p>Now, our brief we believe adequately talked about the direct sale aspects and we believe the Fifth Circuit opinion adequately speaks to that subject and we're going to spend our time today in rebutting that the position that the FPC takes about this plenary transportation authority.</p>
<p>I think that while there is a lot of chaff in this case, we can get to the essence very quickly by my saying that in order to determine the jurisdiction here, all we have to look at is three key factors.</p>
<p>And I'm not going to say as Mr. Plotkin said earlier that this is a simple issue.</p>
<p>But I believe that if we look at the three factors it will simplify the case for the Court.</p>
<p>Those three factors are, first of all, the congressional history.</p>
<p>And in this case I don't believe I can emphasize too strongly, the effect of that congressional history on this whole matter.</p>
<p>The second thing is the decisions of this Court, and I'm speaking now of the Panhandle Indiana case, 337 and the Transco case in 365 US.</p>
<p>And the third is the actions of the FPC itself.</p>
<p>Now, addressing myself to the congressional history first and I'll dwell on it a little bit because as I said it is so important to this whole matter.</p>
<p>We did a rather comprehensive study of that legislative history and it became more interesting all along, because we found that the history here was taking place during 1936, 1937 and 1938, which I believe we all will agree were the high watermarks of the Roosevelt administration in terms of the passage of regulatory legislation.</p>
<p>And an example of that I would say is the National Labor Relations Act, which is I think the Court knows so well has an exclusive or peremptory nature to it.</p>
<p>And I think all of that legislation at that time was of the same type with the sole exception of this Natural Gas Act.</p>
<p>That's an interesting thing about this congressional history is that Congress and apparently it was getting a lot of heat, I would say, from the National Association of Railroad and Utilities Commission as the representatives of the state authorities.</p>
<p>And speaking for the states, they made a strong case for the proposition of dual regulation here.</p>
<p>And as a result, you had -- running like a thread through the congressional history, the proposition that we would have dual regulation and we were going to leave to the states, those things that the states had already been regulating and that Congress felt they could reach and the courts felt they could reach.</p>
<p>Now Section 1 (b) reflects that history because Section 1 (b) really is a two part sort of statute.</p>
<p>In the first part of the statute, it tells what matters will fall into the ambit of FPC jurisdiction, and then it has a 'But' Clause in it, a conservatory proviso which reserves to the states those things that are to be for state regulation.</p>
<p>And it is in that conservatory proviso that we find the saving grace to opposition here because it was there that Congress reflected in the statute that congressional history that I just described.</p>
<p>The second aspect that I find in the congressional history that so pertinent here is that Congress indicated plainly and unqualifiedly that it knew of the Court decisions and the reach of the states under those Court decisions, and specifically mentioned the Pennsylvania Gas Company case during the congressional debate.</p>
<p>I think that without dwelling on any long quotes from the congressional history, I do have a sample that's only one shot couple of sentences.</p>
<p>That sums the whole matter up here.</p>
<p>In House Report for 709, of the 75th Congress which is, I would say is the foundation report, in all of this congressional history and the court will find that this court has many times discussed that House Report and cited it in its decisions.</p>
<p>In that House Report 709, it is said that states have of course for many years regulated sales of Natural gas to consumers in intrastate transactions.</p>
<p>The states have also been able to regulate sales to consumers even though such sales are in interstate commerce.</p>
<p>Such sales being considered local in character and in the absence of congressional prohibition subject to state regulation, and they cite the Pennsylvania Gas Company case and then they say there is no intention in enacting the present legislation to disturb the states in the exercise of such jurisdiction.</p>
<p>Now, Your Honors, it seems to me plain from that congressional history, that the FPC's claim to a plenary transportation jurisdiction, just is completely contradicted by that history.</p>
<p>Because the Congress knew that these direct industrial sales were being made through interstate facilities, which is what the FPC says gives them this plenary authority.</p>
<p>And yet they exempted in Section 1 (b), all of those sales even though they were through interstate facilities.</p>
<p>So, I think the first key furnishes us a rather adequate pick for the FPC coffin.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: Mr. Carter.</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: Yes, Your Honor.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: Turning to 1(b) is there a specific exclusion there, that you are relying on.</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: Yes, Mr. Justice Rehnquist, we are relying on the exclusion that comes about from the conservatory proviso that commences with but shall not apply to any other transportation or sale of natural gas.</p>
<p>Now, we say that that language when compared with the language of the remainder of that section means to reflect the congressional history, that I just talked about of exempting all direct industrial sales even those made through interstate facilities.</p>
<p>That's what that language has been held, I mean this isn't my interpretation.</p>
<p>Now, let's go to the second factor I said was a key here.</p>
<p>Let's talk about for a moment the decisions of this Court.</p>
<p>I am speaking now again of Panhandle Indiana and Transco.</p>
<p>The Panhandle Indiana case involved an effort by a pipeline to make a direct sale in Indiana.</p>
<p>The Indiana commission sought to regulate both the rate of that sale and the service terms.</p>
<p>By the way, you will find in the briefs, although it didn't come out in this oral argument today that (Inaudible) company and I think the Fifth Circuit does too with the FPC when they tried to talk about separating out rate by equating it with sale.</p>
<p>I think it's perfectly understandable from the whole, you might say the conjures of jurisprudence on this whole subject that a sale includes not only rate but other terms.</p>
<p>And their knowledgeable former Chairman Mr. Swidler certainly admitted that during his efforts in Congress.</p>
<p>But back to the Panhandle case, in that case, the state commission was trying to regulate both the rate and the service terms, which is what is put in this case because we are arguing here about curtailment.</p>
<p>The pipeline went in to court and sought an injunction on the ground that the FPC had jurisdiction and this Court held that the FPC had no jurisdiction over a direct industrial sale of the type LP&L has here, and it said that the state could regulate the rate and the terms, the rate and the terms.</p>
<p>Now, may it please the court, it is from that decision, way at the end of the decision about the last paragraph or two that we find a random sentence by Mr. Justice Rutledge, at lo and behold has furnished what I called in my brief the (Inaudible) of dictum that the FPC is hanging on desperately here.</p>
<p>That's a sentence where Mr. Justice Rutledge talked about interruptions of services and suggested that the FPC might be able to handle those in accommodation with the states.</p>
<p>Now, to take that random sentence at the end of that decision after the majority, after the holding had been made that there was this exemption of direct industrial sale in both its rates and its terms, means, certainly that it had to be dictum because otherwise it would contradict the main holding.</p>
<p>But it also rather much picked our curiosity and we went to the brief of Panhandle that Mr. Justice Rutledge was speaking to when he got to that point.</p>
<p>It looked to me like he was just trying to tidy up this opinion and answer all the Panhandle's little complaints and he sure enough was doing that because Panhandle's brief was arguing that there might be a conflict between State Federal Power Commission, if this court were to hold that the state had jurisdiction of the rates and terms.</p>
<p>So, upon looking at Panhandle's brief lo and behold, we found that what they were talking about and therefore what we have to assume Mr. Justice Rutledge was talking about, was a preposition of the initial certification of a direct industrial sale, and unquestionably nobody said, that there is no quarrel in this case about their initial certificate authority as a transportation matter.</p>
<p>And that's what Mr. Justice Rutledge was talking about and it furnishes the FPC no comfort here whatever.</p>
<p>Now, over to the Transco case, which I think is really the dispositive situation here.</p>
<p>That case Your Honors, was a transportation case.</p>
<p>In that case an electric utility in New York state bought some gas down in Texas and wanted the pipeline company to haul it for them, transport it for them to New York.</p>
<p>And the matter came before the FPC on a transportation certificate, the very thing that is in dispute here and the thing that they say, they have a continuing jurisdiction over.</p>
<p>Now what did the FPC do there if they're ever going to be right, it would be in this case, and what happened.</p>
<p>This court held just as squarely as can be, Chief Justice Warren said, “There is only a veto power in the transportation authority of the FPC, only a veto power.”</p>
<p>And of course I think veto power implies initial power anyhow but those are Chief Justice Warren's exact words and then in less than one page later, he said, that the FPC as itself understands does not have allocation power, complete allocation power to use his exact words.</p>
<p>So, Your Honors, it seems to us just as plain as can be from Panhandle and Transco, that you have the second peg in the FPC coffin because there is absolutely no authority in the FPC over a direct industrial sale or the transportation of gas for a direct industrial sale.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: I take it that if the contract here between United and LP&L had expired and United said to LP&L we are only going to send you half as much gas from now on, that ceased transporting that much to LP&L that you say the United wouldn't have to get permission from anybody?</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: No, I think Your Honor at that point at the termination of a contract, you have a situation then developed that is akin to a new certificate because now you're going to have a new contract, so I think if United took that position --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: What if United said, we aren't going to send you anything?</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: They said, we are not going to send you anything, I think we would just have to go look for another supplier, Mr. Justice White.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But as far as I know you would probably have to but wouldn't United have to get consent of the FPC before it terminated this transportation?</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: Actually, I have my own debates within myself as to that to give you an honest answer --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, I mean within the Transco and I suppose that would be a veto if the FPC might say, -- if LP&L came up to the commissioner and says, please don't give them consent, you would say, would the FPC have veto power over that termination?</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: I would think probably not, Mr. Justice White.</p>
<p>I would think they might be able to --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: You must say that.</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: No, I don't think so.</p>
<p>I haven't really thought it through to find out whether it helps me or not actually.</p>
<p>In other words you are little ahead of me.</p>
<p>Now, I think the third key and I will have to try to travel through this rather quickly although, it's halting sort of thing and that third key is the FPC actions themselves and to try to briefly cover it up, I will put it this way.</p>
<p>In the City of Hastings case back in 1954 in Footnote 3 of that case, the court commented on the commission's statement that it had been to Congress, to recommend that it “extend our jurisdiction over interstate sales by natural gas companies to include direct sales to industries and sales to utilities which are not for resale.”</p>
<p>That's the case you have before you today, that's us.</p>
<p>The commission obviously didn't get that sort of authority, nothing had been done to the Act since 1954 and then up to 1963 we come, and we find that, in 1963, Mr. Swidler who was then the Chairman of the FPC and who has a reputation as a very knowledgeable man in this field, had this to say to Congress.</p>
<p>He is talking now to Congress and he says, “under existing law, the commission's authority is limited to sales for resale in interstate commerce.</p>
<p>Hence the price and other terms,” that's my emphasis, “And other terms of a direct sale by pipeline to an industrial customer,” and that's us, “outside this field of this commission's regulatory authority.”</p>
<p>That's the Chairman himself speaking and he then went on to ask Congress, to give them the authority to require that interstate industrial gas sales, that's us, will be made at such prices and on such terms as to realize the potential benefits of such sales to both industrial and domestic consumers and Congress turned him down.</p>
<p>So, now we come up to 1970 and we are getting rather close up to date, and in 1970, this same commission that's appearing before this court and saying we have got this plenary authority, said to Congress that it's recommendation was that Congress enact “a new subsection to Section 7 of the Natural Gas Act, that would enable the commission to determine when an emergency exists, so as to require and now I am emphasizing lower curtailment and allocation,” That's what's being attempted here.</p>
<p>Low curtailment and allocation of gas by any gas company whether or not it is otherwise subject to the commission jurisdiction.</p>
<p>Now, the FPC says in its reply brief that the effort there was to reach distribution companies in intra state pipelines.</p>
<p>Now, Your Honors with all respect to the FPC and I am not saying this meanly but that's just solemn nonsense on their part because they already have a reach of distribution companies by way of their authority over the pipelines.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: Mr. Carter, turning back to 1(b) and in some of this authority that it grants in the first part of the statute, do you conceive the reservations in the latter part of the section, to take away parts that were granted in the first section or are they simply a statement of the adverse side, simply pointing out what wasn't granted?</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: I think they are a very carefully phrased reservation of the powers to the states, so that if you could look at it this way and I am not saying that it's the only way to look at it, but you could look at it as though those first portions of that section or the statement of jurisdiction by the FPC, and that the latter conservatory proviso is to indicate which portions of that upper part are actually reserved to the states.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: So, you say then, that were it not for the provisos, the granting would give broader power if it stood by itself?</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: I am not sure, I understand that question, Your Honor, if you mean if the two sections suppose were separated?</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: Yeah, assume that the granting provisions stood by themselves and what you refer to as the conservatory provisions were absent.</p>
<p>I take it then you would feel that there were more authority conferred in that situation in the way this section is written down.</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: Oh, yes, I do think that.</p>
<p>Now, I think I had just about finished saying what I had to say about the FPC actions themselves of going to Congress to ask for an authority that they are now saying to this Court that they have, and I think that the best evidence of an agency's lack of jurisdiction is the agency's own admission of that lack of jurisdiction.</p>
<p>So I consider that the third peg in the FPC coffin here, and I turn at that point to the issue involved in what is known as a Green System.</p>
<p>And if Your Honors would refer to the first Appendix in our brief which is about midway, it's a foldout map and I assure to court that we have no idea here of emulating any popular magazine.</p>
<p>But this foldout map shows, I think the location and the configuration of the Green System very clearly.</p>
<p>And Your Honors will note that the Green System lies in the very deep part of the, south part of Louisiana, which means you are really getting down south.</p>
<p>And that Green System, Your Honors, is a system that was designed and constructed to be an intrastate system, as you can see merely by looking at it.</p>
<p>And it's a self-contained separate system, and in the court below, by United's own witnesses, we were able to prove that this line is located wholly in Louisiana, the gas going into that launch produced wholly in Louisiana.</p>
<p>It's shipped wholly in Louisiana, it's consumed wholly in Louisiana.</p>
<p>We also show that there was 2.6% or 2.7% of gas from what's known as a Black System, which is an interstate line nearby.</p>
<p>It was artificially injected into that Green System by United in 1970, and I say artificially for this reason, the proof also shows that they need not have put that black gas into the Green System.</p>
<p>And indeed one of their wholly owned subsidiary companies breached some of its contracts in not putting enough green gas into the system.</p>
<p>And so you had a situation there where practically everything about it is intrastate.</p>
<p>The Fifth Circuit looked at that whole situation and they on the teachings of the LoVaca case out of this Court, decided not as FPC has said to the Court today that this matter was de minimis.</p>
<p>It's 2.6%, that had nothing to do with the holding actually.</p>
<p>The Court will find upon reading the Fifth Circuit decision that the decision on the Green System went off on what is known as the channel of constant flow which is a teaching coming out of the LoVaca case, also impliedly out of Amerada.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Didn't our recent case in Florida tend to undermine your position on that?</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: Not at all, Mr. Chief Justice, because you have in the case of the Green System, a wholly different channel, there is a different pressure from the Black System.</p>
<p>Unlike in Florida Power where you had some interconnections, you see electricity is traveling on the same level, let's put it that way.</p>
<p>Here, the pressure in the Green system is at a wholly different pressure than the Black System, so in order to put gas from the Black System into the Green System, you have to manipulate valves and push it into that system, and you can't get it back out of the Green System because the pressure is low.</p>
<p>So, this just guides you naturally into this theory of the channel of constant flow and that's what the Fifth Circuit went off on which was LoVaca all over again.</p>
<p>Finally, on the Green System, I think we just get down to a case of common sense, Your Honors.</p>
<p>Here is a pipeline looking at that map you see where it is, it's laying right on top of some of the largest natural gas fields in the western hemisphere.</p>
<p>And yet here, are people telling us that they have got to inject some black gas, some interstate gas into this Green System in order to make it viable, that's like chopping ice in Greenland and shipping it to Alaska.</p>
<p>There's just no sense to that sort of --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: What was the Court's power to do this ab initio in a suit like this rather than on review of the Power Commission?</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: Mr. Justice White, the FPC voluntarily walked into this cases.</p>
<p>This case started out as a simple injunction suit that pulls our contract.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Let's assume it hadn't walked into it, and the United would have had to plead the primary jurisdiction.</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: Even if it had not walked into it, I would say to you that once it got into it and took part then the Panhandle case applies --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Let's assume it never was in it.</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: Well, if it never was in it, I don't think you would ever have the question of primary jurisdiction arise.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, I don't know, United easily could have raised it.</p>
<p>So it's usually raised.</p>
<p>Let's assume United had raised it.</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: It might have made a difference.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: It could have been arguable primary jurisdiction in the Commission?</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: I don't think it would have been, but it might have.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But in any event the Commissions coming in and litigating the issue curative --</p>
<!-- Andrew_P_Carter--><p><b>Mr. Andrew P. Carter</b>: I think it did in terms of what has actually happened here, yes, Your Honor.</p>
<p>I imagine my time since I see the white line is apparently just about to expire, I will just close Mr. Chief Justice by saying to the Court that what we are saying in essence here and all that we are saying is that we think this Court should stick by the duality of regulation that Congress prescribed, that was put into the Act and that this Court went by in Transco and Panhandle.</p>
<p>I thank you.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Thank you, Mr. Carter.</p>
<p>And Mr. Gooch, you have six minutes of the time that you reserved.</p>
<p>Rebuttal of Gordon Gooch</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Thank you, Mr Chief Justice.</p>
<p>It seems to me most clear from looking at the legislative history of Section 1 (b) of the Act.</p>
<p>When you look at the committee report itself, it says that the language but shall not apply to any say other transportation or sale.</p>
<p>Legislative History says that the coded words were not actually necessary and were put in to replace the language that had previously been in the prior draft of the Bill which was H. R. 4008.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: Mr. Gooch, would you conceive that if your opponents could bring these curtailment matters within the definition of anything that they referred to as the conservatory portions of (b) that you would lose?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: No, sir, because if we are going to lose on that ground, we are going to lose because it's not in the transportation jurisdiction because I don't think those language would be -- based on the legislative history and the reading of the statute, I don't think the 'but for' language makes any difference.</p>
<p>In other words, as the legislative history said the 'but for' language is not necessary.</p>
<!-- William_H_Rehnquist--><p><b>Justice William H. Rehnquist</b>: Okay, but then if it doesn't make any difference, if it's within the transportation jurisdiction, it shouldn't come within any of them.</p>
<p>Conversely, if it is within one of them, it doesn't come within the transportation issues.</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes, I agree, sir.</p>
<p>Now, the Legislative History of 4008 specifically had, 4008 had a clause in it that said that this shall not apply to rates, charged to direct industrial usage, or any other rates, and when you look at the hearings, the whole issue was rate jurisdiction, and this commission was not given rate jurisdiction over retail rates regardless of who made the retail rates, whether it's distribution coming or direct, and we don't claim jurisdiction over rates.</p>
<p>This Court in the Transco, 365 U.S. 1, approximately at page 27 recognized that, that proviso was to take rate jurisdiction out, and these references to Chairman Swidler's testimony was when he was trying to get for the Federal Power Commission jurisdiction over the rates at which direct industrial sales were made because in a rate case of the Federal Power Commission now, we first allocate the cost of the direct industrial sales and throw them out.</p>
<p>And we don't consider them no further and we therefore set rates only to the sales for resale.</p>
<p>We exercised no rate jurisdiction over the direct industrial sale.</p>
<p>And the cases on Panhandle, this is the first I have heard that Panhandle dealt allocations of new service because Mr. Justice Rutledge said, appellant also envisions in conflicting regulations by the Commissions of the various states in its main pipeline serves particularly in relation to curtailment of service when weather conditions or others required.</p>
<p>I don't believe Mr Justice Rutledge can fairly be talking about initial licensing, when he is talking about curtailment in this matter.</p>
<p>The Commission did report in its Annual Report in 1970 that it thought that it should have jurisdiction that compelled the interconnection regardless of whether it had jurisdiction over the pipeline, different types of customers because various distribution companies are occasionally served by more than one pipeline.</p>
<p>Some distribution companies now have their own imports.</p>
<p>Some distribution companies have their own supplies of natural gas and that would supplement and augment our curtailment jurisdiction.</p>
<p>Mr. Justice White, 7 (b) does require.</p>
<p>United may not abandon a direct sale until it comes in and gets permission from the Federal Power Commission.</p>
<p>The mere fact that the contract has expired does not permit an interstate pipeline from terminating any service. 7 (b) prohibits the termination of any service until the Commission has authorized it to do so.</p>
<p>It's not a question of terminating the sale, it's the service.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Did United itself come into this or prior to the FPC?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And under what section did it wrote this?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: It asked for a declaratory order.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Under what?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Under our regular rules of practice and procedures for asking a declaratory order.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But what kind of power the Commission did it asked to be invoked?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Well, you see United already had a curtailment plan as part of their tariff and they did not have to file a new curtailment plan at that time and they asked the Commission, if they were faithfully following the curtailment plan that Commission wanted to follow, and so that would be under -- in my view under both Section 4 and 5.</p>
<p>And the Commission set it down for hearing.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: You said, they already had a curtailment plan?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Yes, it is.</p>
<p>They had a general tariff on file for curtailment.</p>
<p>And they asked whether or not that should be applied also to the direct investors.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: How long had that been filed?</p>
<!-- Gordon_Gooch--><p><b>Mr. Gordon Gooch</b>: Over several years sir.</p>
<p>I don't recall, 6 or 7 years or perhaps even longer.</p>
<p>And then when the Commission found that seven pipelines are having to go to curtailment, fourteen pipelines had to buy emergency supplies of gas.</p>
<p>When the Commission could anticipate that, that was happening and the interstate pipeline were unable to meet, the Commission ordered under Order 431, they ordered all pipelines to file new curtailment plans and the Commission now has some 26 of these pending in order to make a fair allocation of the interstate supplies of gas among the interstate pipelines not the intrastate pipelines.</p>
<p>With regard to the Green System, the Federal Power Commission intervened but all we could say to the Court when we intervened is, we have a proceeding pending in which we are taking evidence to determine what the jurisdictional status of this case is, and all of our evidence was this is what's pending before the Federal Power Commission until the Federal Power Commission completed the hearing, got the evidence, analyzed it, and took a position.</p>
<p>We who intervened on behalf of the Commission were unable to say whether the system was jurisdictional or not, and their findings of the the Commission after review of the whole record was, that if the interstate supply of gas was shut off from that system, on a cold day 67% of the gas used in the New Orleans area would also be shut off.</p>
<!-- Warren_E_Burger--><p><b>Chief Justice Warren E. Burger</b>: Thank you Mr. Gooch, thank you gentlemen.</p>
<p>The case is submitted.</p>
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Thu, 23 Aug 2012 18:19:28 +000062709 at http://www.oyez.orgFPC v. United Gas Pipe Line Co. - Oral Argumenthttp://www.oyez.org/cases/1960-1969/1966/1966_127/argument
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Case:&nbsp;</div>
<a href="/cases/1960-1969/1966/1966_127">FPC v. United Gas Pipe Line Co.</a> </div>
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Transcript:&nbsp;</div>
<p>Argument of Howard E. Wahrenbrock</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Number 127, Federal Power Commission, petitioner versus United Gas Pipeline Company et al, number 128 Memphis Light Gas and Water Division, petitioner versus United Gas Pipeline Company et al. number 79, -- no, those are the only two.</p>
<p>Mr. Wahrenbrock.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Your Honor, may it please the Court.</p>
<p>These cases bring before the Court a decision setting aside a rate reduction by the Federal Power Commission.</p>
<p>The Commission reduced the rates of the United Gas Pipeline because so far as is here involved, United Gas Pipeline had estimated its rates upon the basis of the inclusion of an allowance for federal income taxes based upon the usual corporate statutory rate of 52% it applied -- would apply if United filed a separate return but as a matter of fact, United joins with its affiliates in filing a consolidated return.</p>
<p>And under the consolidated return, the total tax for the group is less than the total of the separate return taxes because some of the group particularly United's producing affiliate union regularly enjoys tax losses and those tax losses have to be absorbed by some of the taxable income of the rest of the members of the group and as a result of that absorption, the group tax is less.</p>
<p>These lawsuits result from the fact that union enjoys the special deductions that most oil and gas producers enjoy.</p>
<p>I refer to the provision for the expend thing of productive well intangible drilling costs and the provision for depletion at the statutory percentage of income.</p>
<p>Union is in fact highly profitable over at the five-year-period for which tax information is particularly irrelevant here; its net income have reached $14 million a year.</p>
<p>The Commission --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: There's another consolidated company in here too, its overseas or somebody?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes, it participated only one -- in only one of these five years and had a $25,000.00 loss which is negligible for these purposes.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: It's the producing company which has got the live share of these --</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes.</p>
<p>The producing company's average tax loss over the five-year-period was $800,000.00 a year.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Did both of these -- either of these one jurisdiction companies have an income (Inaudible)?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: All of the companies had taxable income and in one year union itself had taxable income.</p>
<p>In one year, no other company other than United Gas Pipeline had taxable income.</p>
<p>They all had losses in one year.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Do you say the producing companies the one that in this case that is responsible for the losses?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes.</p>
<p>On the average, it has an $800,000.00 a year of loss.</p>
<p>There are occasionally were losses by other companies.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: What source of loss in the producing company, this what -- there were declaration expenses at all?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: The sources of the loss are these two provisions for deduction of intangible drilling cost and statutory depletion.</p>
<p>The rates were here tested by the Commission and new rates fixed upon the basis of the so-called cost of service method that the Commission has used since rates fixed by that method were first approved by this Court in the Hope case in the 1940's.</p>
<p>Under that method, the Commission determines the average unit cost of service on the basis of the business done in the test year including a fair return on the amount prudently invested in the business after income tax.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: What business?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: In the regulated business, the business for which the rates are regulated.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: So, you account separately for the -- in making rates for the regulated business and the unregulated?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: That's right.</p>
<p>We make -- if our company has both regulated and unregulated business there has to be an apportionment.</p>
<p>Because of the year to year variations in the level of taxes paid on this consolidated return, the Commission looked to taxes not only for the test year but for a representative period of years, five years and there is no question in this case that the period of years from 1957 to 1961 that the Commission used was a representative period for that purpose.</p>
<p>The Commission determined United share in the consolidated return taxes for those five years in this manner it divided the group's total taxes for the five-year-period by five to determine the average consolidated tax paid by the group in each of those -- over that five-year-period.</p>
<p>And it allocated a proportionate part of that average consolidated tax to United on the basis of United's -- the relationship of United's taxable income on a separate return to the total taxable incomes on separate returns that United was 92.11% of the total, 92% produced the share that was allocated to United and the Commission determined that that share amounted to 50.04% of United's taxable income on a separate return.</p>
<p>And therefore, it estimated that over the future years for which this rate would in effect, United as a participant in the consolidated return would have to pay taxes that could be estimated on the basis of this past experience at this -- as an effective consolidated return rate that United's taxes would in effect be 50.04% instead of what its rate would be on a separate return basis 52%.</p>
<p>And using that as an estimate, the result was that the rate -- rates the Commission fixed in effect allowed United for every 50 cents of return, 50.04 cents for income taxes.</p>
<p>Not less, because the company is entitled to the fair return, the intended fair return after taxes not more because the rate payers entitled to the lowest reasonable rate.</p>
<p>It was this apportionment that the court below set aside said that the Commission doesn't have power, doesn't have jurisdiction to make such an apportionment.</p>
<p>It did this by a short per curiam opinion and which have attempted no rationalization of its own but referred to the decision of the Tenth Circuit in the City Service case that have been decided in October of 1964, and said that the principles of that decision were applicable in controlling here.</p>
<p>The Tenth Circuit had said that the 52% a tax upon the regulated company at 52% represented its actual tax liability that the consolidated return reduction is due to the tax losses of the loss companies ignoring any need that those losses be absorbed before there can be a reduction.</p>
<p>And that is said that to apportion any part of the -- to the regulated company of the tax reduction is to assign to it the tax consequences of profits or losses as the case may be of other businesses other than the business of his being regulated and said that that transgress the jurisdictional limits Congress had imposed upon the power commission.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Did the Commission -- they were to granting a (Inaudible)?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: No.</p>
<p>The petitions for certiorari in this case presented only the question of the Commission's power to make an apportionment not any question of the Commission's -- the method of apportionment that had not been commented upon by either of the Court's all that had -- the really been litigated objected to before the Commission or the court below and certainly all that have decided was that the Commission did not have power and I shall therefore confine my argument to the question of power.</p>
<p>The assumption --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: May I just too, wherein myself is -- would there be an oversimplification of the matter to say that the Commission will take into consideration in -- even though the consolidated return is made only the income of the regulated that is the tax condition of the regulated company without reference to the non-regulated companies that are associated with it or in its combined --</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: The Commission applied to the regulated business a tax rate which represented what this experience over the pass year of five years had shown was the effect of allocating a share to United of the total affiliated group's tax payment.</p>
<p>Now, the assumption that there is anything actual about a 52% tax liability for United under the circumstance of this case is simply wrong.</p>
<p>The only source of any tax liability is of course the Internal Revenue Code and when a consolidated return is filed, the internal revenue code is as explicit as language can be that there is only one liability -- liability for the tax, for the consolidated group.</p>
<p>Each member of the consolidated group is liable for that total tax.</p>
<p>The parent corporation under the internal revenue regulations, apparent corporation generally acts as the sole agent for the group making filing the returns and dealing with the internal revenue service.</p>
<p>There is nowhere in the code, any provision for any lesser tax liability than the total group tax liability and the code is explicit that there may be no contract entered into among or by among the members of the consolidated group or with anyone else, that affects alters or affects that total liability or that liability so imposed in any manner.</p>
<p>Now, there is no expressed contention in this case that I know of, that the Internal Revenue Code or the regulations do not make that consolidated tax liability a joint tax cost on all members, but two claims are made that it is not a joint cost that are in direct conflict with the code provisions as well as effectuate erroneous and I want to take up those two-principle plans.</p>
<p>A witness for United testified that the producing company union could've absorbed these losses out of its own taxable incomes it if -- it itself have filed separate return.</p>
<p>Union and one of these five years had taxable income.</p>
<p>In the other four years it had tax losses, on the average its tax losses exceeded its tax -- taxable income, but the claim is made that if it could use on a separate return it's carry over and carry back provisions.</p>
<p>It could absorbed its own, there were no figures put in to support that claim.</p>
<p>The only figures that are in the record are the claims, are the figure showing that the average on the average its tax losses exceed its taxable income by $800,000.00 a year.</p>
<p>The result is that -- if those figures are representative and there's no question that they are, that the longer you carry it back the more your -- your taxable losses exceed your taxable income or the longer you carry it forward.</p>
<p>So, it must be a reasonable conclusion that the carry back and carry forward would not enable union to absorb the tax losses.The on cross-examination union's witness attempted to buttress his position.</p>
<p>He said union could change its method of doing business, it could sell production payments and thereby anticipate future income, a new side income realizing its income immediately to absorb its losses or it could alter its well drilling program to avoid incurring excessive losses at a time when it couldn't absorb.</p>
<p>But rates, if the Court please are not fixed on self-serving speculations as to alternative ways that business could be done and not be taxed so much or taxed less.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But -- isn't there -- is there another answer to that claim?</p>
<p>Let's assume it's true, absolutely true that the union could have absorbed all of these losses and put his income to do it, there is no question that the -- is that critical in your case?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Well, there is of course the fact that they have elected to file a consolidated return --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: In fact, that some of the losses have been charged against the regulator.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: They have elected to file a consolidated return presumably because that means that it is beneficial to them to make that election.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And as a matter of fact to the consolidated return to reduce the taxes of the regulated company.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: On a separate return the regulated --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Because some of the losses are charged to get it against of income.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: On a separate return, the regulated company would have higher taxes than a total of its taxes and the taxes of the other companies on a separate return basis would be higher than on the consolidated basis because of the absorption of the losses.</p>
<p>The group having elected this method, it is hardly persuasive for it now to say when its rate comes under scrutiny that it could have achieved the same benefit by filing separate returns and in any event, what might have been true on separate returns is irrelevant.</p>
<p>They have made the election and they filed a consolidated return.</p>
<p>The other claim that is made is that the participation and the consolidated return by United does not increase the consolidated return rate reduction and this is attempted to be demonstrated by a table that is set forth on page 23 of United's brief, that's the white brief, the small white, the square bound edge, page 23.</p>
<p>Now, this table is the counterpart of a table that appears in the Gas -- City Service opinion, turn it to facts of that case, such a table can be made wherever over the period of years for which taxes are being scrutinized.</p>
<p>The total losses of the group can be absorb by some -- by the taxable income of the group without including the taxable income of the regulated company, but it does not prove, it assumes the question to be proved is to what justification there is when a consolidated return is filed and there are two corporations as here, Gas Service Corporation -- Gas Corporation and United both of whom have taxable incomes.</p>
<p>What reason there is for assuming that taxable income of the company that is not before the Commission is the taxable income that absorbs the tax losses?</p>
<p>The group can turn right around when Gas Corporation's rates are under review in the States of Texas or Mississippi or Louisiana and construct the counter part of this table and say that Gas Corporation's participation in the group was not necessary because United's income would've absorb it all.</p>
<p>There is no suggestion of any reason any economical justification for preferring one corporation, one taxable income corporation over another taxable income corporation to use that one's income over the other in the absorption of the losses.</p>
<p>As a matter of fact, United has about 10 times as much taxable income as Gas Service Corporation on the average.</p>
<p>In one year, Gas Corporation, the state regulated corporation has had no taxable income so in that year, the losses of Union had to be absorbed by United's because under the code and the regulations, the taxable losses must be absorbed by the taxable income of that year -- of the current year before there can be any use of carry-back or carry-over.</p>
<p>In another year, Gas Corporation had some taxable income but not merely as much as the taxable losses.</p>
<p>So, that in true of the five years that were representative, Gas Corporation taxable income could not include the taxable losses of that year, it had to be United's that absorbed on that year under the provisions of the code.</p>
<p>The table therefore which assumes the question to be answered it assumes that Gas Corporation's income should be regarded as absorbing the tax losses is just a reminder of the old carnival game, the money is in under a corporate shell you're looking at.</p>
<p>The joint nature of this tax cost is substantive is not merely formal.</p>
<p>The purpose of the code provisions that produced Union's tax losses, the provisions for percent of income depletion and for the expensing of intangible well drilling cost, congressional purpose in making those provisions it is well established is to encourage the exploration and development of oil and gas properties.</p>
<p>The relation of that purpose to the regulation of gas rates, under the Natural Gas Act has been eliminated by Judge Tuttle's opinion for the Fifth Circuit in the El Paso Federal Power Commission rate case in 1960.</p>
<p>Judge Tuttle there began by noting that in fixing rates the return on investment is itself fixed high enough to attract additional capital for necessary expansion to the business.</p>
<p>Judge Tuttle continued this does not mean that the tax savings that are produced by intangible well drilling and statutory depletion provisions are to constitute a profit over and above a fair rate of return, because the congressional purpose of these tax benefits can be achieved by translating them into reduced rates that will enable more gas to be sold in competition with other fuels and the importance to United Gas Pipeline of competition need not be argued because it was argued before this Court, this term by United's own counsel, Mr.Woods in the abandonment case, United against -- Gas Pipeline against Federal Power Commission.</p>
<p>When Mr.Woods pointed out in this prime -- a slight reflection in Mr.Justice White's opinion in that case near the end, Mr.Woods pointed out that United had to buy its gas at the very lowest rate it could buy that in order to enable it to continuance to maintain its sales of industrial gas in the market against competing fuels.</p>
<p>Now, if competition is that important to United, a failure to translate these tax benefits into reduced rates allowing them to result in increasing United's rates will have the effect of constricting the marketability of the gas.</p>
<p>The marketability of the gas is constricted.</p>
<p>It will be impossible for Pipeline's to show the necessary marketability and the economic feasibility of expansions and without expansions these tax benefits can never achieve their purpose of providing an incentive that will successfully encourage exploration and development because there will not be the demand upon the part of Pipelines that will unable that -- will make that attractive.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well the rate on this -- on the Government's basis the rates have to change every year when the business fortunes of related companies keep changing, sometimes they have income, sometimes they don't if all the entities in this consolidated group had income, I suppose the regulated company would have some tax to pay perhaps 52%of the --</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: The element that I understand your question to relate to his the tax element and that was the reason instead of using as the Commission usually uses a test year, a single test year which normally in the case of the normal utility, electric utility or gas pipeline is a sufficient basis for estimating the future, the Commission did not confined itself to one year but looked to five and there was no question in this case that that is representative.</p>
<p>Now, looking to five years it fines what the average tax was -- and because of there were these variations from year to year but finding that five years was representative it took that experience that effective rate of 50.04% instead of 52%.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: That you apply the same rule to a single entity, suppose one corporation has the regulated department in a non-regulated department then the unregulated department has the losses and the corporation pays no tax because of those losses.</p>
<p>I suppose you apply the same rule to that, don't you?</p>
<p>Or do you have any such experience?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: There is so far as I know no question, no case and which the Commission has considered that question and decided it.</p>
<p>The El Paso case --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But it would, it would sound like in a fortiori case.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: In every case, the Commission makes an allocation of cost between the regulated and unregulated business and then the Hope Natural Gas, the Colorado Interstate case which was decided the same year of the Panhandle case that has been cited by our opponents in this case.</p>
<p>Mr.Justice Douglas pointed out that in that kind of a case, the allocation that the Commission made by the usual accounting method between the regulated and unregulated business of the single corporation was all that was necessary that that satisfied the requirements of separating regulated and unregulated business.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Does an unregulated business ever have a loss?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Ever have a what?</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Does an unregulated -- does a regulated business ever have a loss at the end of the year?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Well, the mark of utility earnings, the fixing of fair return is to allow such a return that they will be able to continue in business and to continue to attract back capital.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: So, I gather it's just academic to ask you, what you do about this problem that if the regulated company has a loss.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: We, -- our Commission has had no experience with that.</p>
<p>there have been trams -- electric speed railways, there have been railroad problems that I think provide no particular answer here.</p>
<p>The importance --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But in any event, if a regulated company did have a loss over every year for five years you would still allow that tax -- in setting rates you'd still allow the tax benefit even though they paid no tax?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: What we had -- the Union producing company itself was in a rate case before the Commission.</p>
<p>It was decided just four months before this case was decided by the Commission and in that case, inconsistently with the claim made here that these reductions belong to the loss company to union.</p>
<p>Union didn't there concede any negative tax.</p>
<p>Union in fact was claiming a 52% tax in spite of the fact it was enjoying tax losses every year.</p>
<p>The Commission allowed it, a zero tax or I think that answers Your Honor's question, no tax because it wasn't paying any.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, how does the -- how does the regulated company then ever get its rate up to what they ought to be?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: It has all of its cost of service including a fair return on its investment allowed in its rates.</p>
<p>It just is not allowed any money in its rates for taxes that it doesn't pay.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Yes, but if the regulated company is losing money because of insufficient income, I would suppose its rates are (Voice Overlap).</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: It's losing money if Your Honor please here --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, I understand in this case.</p>
<p>This is different case here?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: These are tax losses not real losses.</p>
<p>Now, the --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, you don't think intangible drilling costs aren't real losses?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Right.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: They certainly cost a lot of money.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Judge Tuttle's observations in the -- Judge Tuttle's observations in the El Paso case are particularly relevant here in spite of the fact that the consolidated -- the El Paso case did not involve a consolidated return because El Paso involves in a single corporate entity both a regulated pipeline system like United's and a production department like Union and the purpose -- one of the purposes of the consolidated return is to enable an affiliated group of corporations constituting an economic entity, the same privileges and benefits in paying their taxes as though they were a single corporation.</p>
<p>In other words, the purpose of the consolidated return -- a purpose of the consolidated return is to enable a group like this group to treat its tax losses the same way it would if it were single corporation such as El Paso and that United group is an economic entity unified economic entity we discuss a great length in our brief.</p>
<p>I just here want to quickly point out that these corporations are united by 100% common ownership of all stock and debt, long-term debt that gas corporation obtains 96% of its gas supply from United that Union producing company sells 80% of its output of gas to United that the affiliation of the companies assures that there will be a continuation of this relationship and that United will continue to provide a market for Union as Union seeks to expand its output and that United will provide a supply of gas for gas corporation as long as gas corporation continues to need an increasing supply and that United will have its ability to do that enhanced by the fact that United is a much larger corporation than either of these two that it has much larger non-affiliated supplies and much larger non-affiliated markets that it does not have to continue to supply and therefore is in a strong position to continue to maintain the position of its two affiliates, that United is a consistent source of absorption of the taxable losses of the affiliated group and that United provides the vehicle for translating these tax losses not utilized by Union itself into the benefits that Congress intended them to achieve.</p>
<p>Thank you.</p>
<p>I'd like to --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: What is the difference between -- what is the reason of the Commission's rejection that is there on the (Inaudible)?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: The difference there was a difference in the method of allocation of share and --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: I understand that but I (Voice Overlap) --</p>
<p>-- and not a question of power and therefore not here so far as I can quickly make a suggestion.</p>
<p>It seems to me that the principle factor that was involved was that under the particular relationship of the corporations that were there involved.</p>
<p>Those corporations could've been realigned corporately very easily.</p>
<p>As a matter of fact before we could bring the case -- could've brought the case to this Court, the holding company, the parent corporation had disposed of enough of its stock in the regulated company and that the regulated company was no longer a member of the affiliated group with that possibility of change that would affect the tax rate; there was no occasion for pressing it there.</p>
<p>The Commission seems to me to have been seeking to avoid using as a basis for determining the taxes would be paid, an assumption that could be easily avoided by re-incorporation and it therefore left to one side those non-regulated companies that could be reincorporated and incorporate with in one corporation enough income to absorb all of the losses that were producing the reduction there.</p>
<p>I'd like to reserve the rest of my time if I may for rebuttal.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: You may.</p>
<p>Mr.Goldberg.</p>
<p>Argument of Reuben Goldberg</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Mr.Chief Justice, may it please the Court.</p>
<p>I'd like to before launching into our argument the Court's convenience and information, draw the Court's attention to the fact that in the printed record at page 24 of volume 2, there appears the reproduction of an exhibit presented by the petitioner Memphis in that case which shows the taxable income or tax loss situation during the representative period in those cases.</p>
<p>I mentioned that reference because it has been referred to by Mr.Wahrenbrock in his argument.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: What volume is that?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Volume 2, it's all in one on a printed record, volume 2 of the lower court record has been incorporated.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: At page what?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Page 24.</p>
<p>I might also say Mr.Justice White that if a regulated company is suffering real losses not tax losses, it means that it needs a rate increase so that it will be earning a fair return and recover all of its operating costs.</p>
<p>In that situation, if the case were before the Federal Power Commission, the Commission would determine what the fair return is and what recovery of operating expenses are required and on the basis of that income determine what actual tax liability --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: There would be.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: -- there would then be and it will allow it in the cost of service.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Even though and it would go on allowing it even though the company continued to have losses because somebody has made a mistake.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Well, if the Commission has correctly forecast --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Yes, but I think let's assume they haven't.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: If they haven't, the losses would continue and there has to be a further review of the rates.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And yes, and they would -- but they would continue to allow the tax?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Give them a tax.</p>
<p>Now, the only point being that there are circumstances under which the tax factor its calculated in the rate although the tax has been paid.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Only because the forecast as to the future doesn't turn out that way and if it turns out that in fact the tax liability is less than the Commission had forecast and this indicates that there ought to be a rate reduction the Commission would have the power to review it.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And I suppose you position is in this case that the five-year-period is a forecast?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: It is --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Really, it has to forecast as to what tax liability actually will be in the future.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Precisely and the Commission used this five-year span rather than the single span to try to be as certain as it could be in forecasting that this would be the actual situation.</p>
<p>The legislative history of the Natural Gas Act under which this case arises is unusually informative and instructive on the very issue in this case.</p>
<p>It informs and instructs that the Commission's treatment of the tax-saving resulting from the consolidated income tax return is fully authorized and sound and that the treatment contended for -- by United in this case was regarded by Congress as detrimental to consumers and was intended to be prevented by the Commission in the administration of the Natural Gas Act.</p>
<p>The relevant history of the act begins with the Federal Trade Commission's comprehensive investigation of the electric and gas industry in the 1930's.</p>
<p>That investigation revealed that when the consolidated tax return was filed by an affiliated group of companies, it was the practice of the parent to deny any share of the tax savings to the subsidiaries.</p>
<p>What the parent did was to appropriate all of the tax saving to itself as profit and it accomplish this by requiring these subsidiaries to pay to the parent an amount of federal income taxes which the parent would have paid if instead of joining in a consolidated return it had filed a separate tax return.</p>
<p>And by this device the parent then collected from the group an amount for federal income taxes in excess of the actual taxes paid to the treasury department and the difference was pocketed by the parent this profit.</p>
<p>At the same time, the subsidiary recorded the amount have paid the parent in its accounts as its federal income tax cost and regulatory commissions in fixing rates required the consumers to pay rates based upon this tax which was never paid by anyone to the United States treasury.</p>
<p>The Trade Commission reported to Congress that the operating expenses of the subsidiaries were thus inflated, that was the word they used, and the inaccurately recorded again using their words of the true cost of operations.</p>
<p>And Congress was informed that the operating subsidiaries were "entitled to the benefit of any tax savings to the group due to the filing of a consolidated income tax return."</p>
<p>They went on to say that this should be done on the basis of a proportion of the taxable income and I might address for a moment to say this is precisely the end-result of the Commission's method of allocation in this case.</p>
<p>The Trade Commission recommended the enactment of remedial legislation to curve and prevent this and other financial and accounting practices which should describe as the detrimental to the consumers.</p>
<p>As Mr.Justice Douglas stated in the Hope case, reported in 320 U.S.referring to the Natural Gas Act using his words Congress addressed itself to these "specific evils."</p>
<p>To prevent this exploitation of consumers by this practice and others Congress armed the Commission with comprehensive rate making powers and these are revealed in Sections 4 and 5 of the Act and additionally, it gave the Commission complete control of what was to be recorded in the accounts of the natural gas companies in Section 8 of the Act and they went so far as to even give the Commission the power to examine the records of affiliated companies even though they were unregulated with respect to transactions that bore on the business of the regulated company.</p>
<p>As Congress intended and as the Commission's statutory authority contemplated.</p>
<p>The Commission with Court approval through the years has given no order to fictitious cost in accounting and in rate making has steadfastly refused to settle consumers with fictitious cost including fictitious tax loss.</p>
<p>And where the natural gas company has participated in a consolidated tax return the Commission in fixing the regulated utilities rates has refused to include a hypothetical tax allowance based on a separate tax return basis as in this case it has included in the cost of service only a tax allowance at the effective tax rate resulting from participation in the consolidated tax return.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: I seem to remember in the briefs that your co-counsel in the other side don't agree with you about the Commission practice.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: They mentioned one case, if I recall.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: No.</p>
<p>They said, there's only one case that seems to look in your favor, they mentioned several cases on the other side if I remember correctly from the briefs.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Mr.Justice Stewart, they argued that the case as we cited at page 15 of our brief are not cases which involved non-regulated tax losses but they are in error.</p>
<p>The cases which involved companies of the Columbia Gas System in that list of cases for example the Atlantic Seaboard Corporation, United Fuel Gas Company, Cone Gas Company, I think Penn-York is another, involved a group of companies one of which at least was a non-regulated oil company.</p>
<p>So, we have precisely the same kind of situation we have here.</p>
<p>To the extent that there has been any deviation from that long established practice that was only in the Owen case that was decided in 1957 is reported in 17 FPC at 685.</p>
<p>And in that case, the Commission in its opinion described the circumstances of the case as and I use the Commission's words, well not unique and the case itself virtually sui generis, the end of the Commission's quotation.</p>
<p>And the Commission went on in that case at page 696 of its reports to say that the examiner's decision in their case and its own decision were not to "stand as president for fixing just and reasonable rates for any natural gas company in any future case."</p>
<p>So that I think we may fairly say that except to that case which the Commission said wasn't to be a precedent.</p>
<p>What the Commission has done in this case in insisting upon including in cost of service and imposing upon consumers in rates only an actual tax liability that it has been a long established consistent administrative practice and Memphis submits if the Court please that if the decision of the court below is permitted to stand we will have returned to the practices detrimental to consumers which the trade commission condemn and which Congress acting on the Trade Commission's recommendations wanted to prevent by passing the Natural Gas Act as well as parts 2 and 3 of the Federal Power Act in 1935 and the public -- the Holding Company Act with respect to holding companies and that's because United wants the consumers to pay in rates a tax that is not paid to the treasury and which United's own brief and it seems to us concedes will simply mean additional profit to the parent United Gas Corporations.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, Mr.Goldberg, how does on the regulated companies actual, let's say it's a profit and loss statement at the end of the year.</p>
<p>Say a certified accountant was certified to what its income -- that income was at the end of the year.</p>
<p>What figure would it show as for taxes pay?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: In a balance sheet (Voice Overlap) --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: In an operating statement.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: In an operating statement prepared by the certified public accountant.</p>
<p>He would probably reflect what the company had done or the group had done amongst themselves under the tax loss it would have to be an allocation which allocation is --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Yes, an allocation but the -- in terms of this one company how much cash tax actually goes out?</p>
<p>It's only it's out of the share of the taxes that actually goes out.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: That's what he would report went out as taxes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And so it's operating statement would just show that the actual tax expense or the tax charge begins income with only be the actual cash outgo for that --</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Actual cash transferred from the subsidiary to the parent.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Yes, that would only -- so, it wouldn't be 52% it would be 50%.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: It would be whatever the parent had dictated should be done to the subsidiary and in the days before the Natural Gas Act the parent dictated --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: No, I'm talking about now.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Well, even today unless the Federal Power Commission's regulation is involved the --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, let's just take a (Inaudible) assume that without the consolidated statement incorporate that the regulated company would have paid $50,000.00 to federal income tax?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: To the treasury?</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: To the treasury.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: With the consolidated statement if share of net of income taxes is $25,000.00.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: In preparing a proper operating statement it should show federal income taxes only at this $25,000.00.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: So that its own accounting would show just the actual cash outlay for taxes and it thus increases its net income, I mean this consolidated return increases its own net income available for dividend as compared with non-consolidated.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: I hope we're together on this and just to be sure we are may I try to state what my understanding of the situation is.</p>
<p>If we have a regulated company or a company, paying taxes itself on a separate tax return basis, its tax is whatever the taxable income is times the governed corporate rate and that's reflected in its accounts.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, let's assume that's $50,000.00.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: That would be reflected in its account as federal income taxes and its accounts would probably also show the disbursement of the -- a reduction in cash by $50,000.00.</p>
<p>Now, I'm not sure that I understand the other situation that you were opposing for me.</p>
<p>Is it the same company --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: I'm supposing the actual facts in this case then where there is a consolidated return not a separate return.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Well, in the actual facts in this case are that as between the parent and subsidiary, the transfer of cash from the subsidiary to the parent for federal income taxes was at less than the 52% rate.</p>
<p>And actually, I think at a rate of 48 -- an effective rate of 49% whereas the Commission has used in effective rate are reason of its test period of 50.04%.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: So, what would its accounting, its certified public accountant say its tax cost was for the year?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: At the 49% rate.</p>
<p>I guess my time is, very much, my time is up.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Very well.</p>
<p>Mr.Fletcher.</p>
<p>Argument of Thomas Fletcher</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Mr.Chief Justice, may it please the Court.</p>
<p>Before I present the argument that I would like to present to this Court, I should like to say that the most significant thing to me about the arguments just presented is the complete absence of identification to this Court of the fact that the tax losses are appropriated for United's jurisdictional customers by this device are oil tax losses of an affiliate Union producing company not subject to FPC regulation whose cost and expenses are at no point included in United's taxable income.</p>
<p>That is the jurisdictional sickness which two dissenting commissioners noted and which both the court below and the Tenth Circuit and city service said was the unlawful part of the sort of that required to be set aside.</p>
<p>United Gas Pipeline Company which I shall call United is a natural gas transmission company purchasing, transporting and selling natural gas in intrastate and interstate commerce for resale and also for direct consumption.</p>
<p>United's parent, United Gas Corporation, thereafter coal Corporation owns all of the outstanding stock and long-term indebtedness of its three subsidiaries, United, Union Producing Company and United Overseas Production Corporation which I shall call overseas.</p>
<p>Union is in the business of exploring, developing and operating oil and gas properties.</p>
<p>Overseas operating wholly outside of United States is engaged in oil operations in Africa.</p>
<p>The operations of corporation, United, Union and Overseas are entirely different, separate and distinct and of entirely different nature from the operations of each of the others.</p>
<p>Corporation is not regulated by FPC.</p>
<p>Its distribution business is subject to regulation by state agencies.</p>
<p>United's interstate sales for resale which constitute 44% of its sale is regulated by FPC.</p>
<p>Its intrastate sales to city gates are regulated or subject to regulation by state agencies.</p>
<p>Direct sales to industries generally are not regulated.</p>
<p>Union's interstate sales of gas approximately 50% of its sales are regulated by FPC.</p>
<p>Its sales of oil and intrastate sales of gas are outside of FPC jurisdiction and are not regulated.</p>
<p>Every jurisdictional sale of gas made by United and by Union or add rates in contracts or rate schedules on file with the Federal Power Commission and approved by it.</p>
<p>Overseas is not subject to FPC or any other regulation.</p>
<p>The United group does been qualified filed consolidated federal income tax returns during the FPC representative period of 1957 to 1961 being joined in 1961 by overseas.</p>
<p>In a section for rate review of United, the FPC in computing federal income tax component and United's cost of service instead of applying the statutory corporate rate of 52% to United's taxable income substituted for that rate a lower so-called consolidated effective tax rate of 50.04% not statutory to provide it which results from a computation after utilizing deductions and tax losses arising from operations of United's affiliated companies.</p>
<p>This consolidated effective tax rate is attributable to United's joinder with its affiliates in a consolidated federal income tax return filed by the parent corporation.</p>
<p>This computed consolidated effective tax rate gives United's jurisdictional gas customers the benefit of tax deductions and losses which are not United's but which belong wholly to its affiliates union and overseas and arise solely from their oil operations which are not only not subject to FPC jurisdiction but are none utility operations wholly unrelated to United's operations and not reflected in United's cost of service.</p>
<p>Thus, it's frame the question for decision whether the FPC may utilize such oil tax deductions and losses of United's affiliates to reduce the federal income tax component includable in United's cost of service on which United's rates for sale of gas regulated under the act are based.</p>
<p>The effective consolidated tax rate formula originated in 1963 in the FPC city service decision on review the Tenth Circuit declared that acknowledge jurisdictional limits required an effective separation of activities, profits and losses between regulated and non-regulated businesses in determining the tax allowance includable in cost of service.</p>
<p>Otherwise, it quoted this Court's opinion in Panhandle Eastern versus FPC at 324 U.S., "the profits and losses as the case may be are the unregulated business would be assigned to the regulated business and the Commission would transgress the jurisdictional lines which Congress wrote into the act."</p>
<p>Because the FPC order and its three step allocation violated this principle by taking into account tax losses of non-regulated and unrelated affiliates to calculate the tax allowance includable in the cost of service of the regulated company, the order was set aside, it's unauthorized while that appeal pending, the FPC directed application of its city service formula to United declaring complete factual similarity between the two cases.</p>
<p>In the court below, United asserted the same jurisdictional violation of judge by the Tenth Circuit claiming direct and unequivocal support from that decision.</p>
<p>The Fifth Circuit declared the Tenth Circuit's decision correct and its principles here applicable in controlling and set aside the (Inaudible).</p>
<p>Apart from other compelling reasons, there are two reasons which in my submission require full and speedy affirmance of this judgment.</p>
<p>In the first place, the FPC in its brief at page 15 and at page 10 in this petition footnote 8 concedes the fact that this formula does have effect to appropriate the whole of these unregulated tax losses of the unregulated company and give them to the regulated company.</p>
<p>Thus, it confesses their very jurisdiction of transgression which both the Fifth and Tenth Circuit's judge.</p>
<p>The FPC seeks to retrieve by suggesting its order might be supported by some character of a "sharing of benefits" of the non-jurisdictional tax losses but it is clear that a sharing of these non-regulated, non-jurisdictional tax losses with United's jurisdictional customers would also be unlawful or it would produce the identical jurisdictional transgression for which the court below vacated this order, a jurisdiction violation which the FPC now admits.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Mr.Fletcher, I want to make clear what you say the Commission concedes on its brief on page 15.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes, sir.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: What language you were referring to?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Let me get it for you, Your Honor.</p>
<p>On line 15 -- page 15 line 2, you begin the court below did not criticize the particular formula which as applied to the facts of this case results in "allocating the whole of the savings to the companies that had taxable income."</p>
<p>Then when you go over to the reference in the petition Your Honor, you will see that the language is just plain sidewalk language that identifies "savings" as precisely the same thing as these unregulated tax losses.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: And then the petition it's note 8, did you say?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Footnote --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: 8 on page 10?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes sir.</p>
<p>There may be indeed problems in the application of the particular formula used by the Commission in this case a formula which may result in allocating the entire tax saving resulting from losses on unregulated activities to the regulated members of the consolidated group.</p>
<p>In the petition, they used the dubious word "may".</p>
<p>In the brief, they went to the flat word "does".</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Its parenthetical material that you --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes sir.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: -- referred to on page 15 of the brief.</p>
<p>Thank you.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes.</p>
<p>The FPC exposes this sharing to be specious or declares that the parent's income for the representative period was in excess of $9 million almost three times the aggregate of Union and Overseas non-jurisdictional, unregulated in all of tax deductions and losses of $3.8 million.</p>
<p>The parent put up the capital that produced these tax losses as the sole investor of union it is clearly entitled to all of the benefits of such losses because of the provisions of the tax regulations governing adjustment of the parent's tax cost basis to the extent such tax losses cannot be recouped by Union.</p>
<p>In the second place, the FPC represents to this Court at page 7 of its brief that under its formula any losses sustained by an unregulated company or activity must first be set off against the total income of all unregulated operation.</p>
<p>This, like the formula's first step separate the companies in the regulated and unregulated groups necessary is in the juror -- jurisdiction of context of regulated under the act.</p>
<p>Regulated really can have no other term of reference but in applying its illegal formula, the FPC completely disregarded this, corporation the parent was not subject to it's regulation but it placed corporation wholly in the regulated group and an authorized act.</p>
<p>Though United was only 44% subject to its regulation, the FPC ignored the greater 56%, non-jurisdictional and placed United entirely in the regulated group.</p>
<p>Hardly 50% of Union's business is subject to FPC regulation.</p>
<p>Its intrastate gas business and substantial oil business is unregulated for the representative period its gas business had a taxable income of $507,000.00 while its oil operations resulted in a gross loss of $4.3 million overseas in 1961 had a loss of an excess of $24,000.00.</p>
<p>It is readily apparent that a meaningful and proper separation into regulated and unregulated groups as step one specified would place far greater income to unregulated operations.</p>
<p>56% of United's operations alone would produce an amount far in excess of union and overseas oil tax deduction as noted the parent's taxable income of $9 million all from activities not regulated by the FPC was almost three times the amount of this oil tax loss.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, Mr.Fletcher, excuse me please.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Do you suggest that the Commission has incorrectly determined the actual tax cost to the regulated company?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: I certainly do so.</p>
<p>I say that the Commission was without any power and it was --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But isn't this question --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes.</p>
<p>I say that if --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: As a matter of fact, the Commission incorrectly determined what the actual out of pocket tax cost was (Voice Overlap) --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: 52% of United's taxable income and this record shows that a check for that amount is written.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: To whom?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: To the Government.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: By whom?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: By United Gas Pipeline Company.</p>
<p>That's at the page 76 and 77 of volume 1 of the joined appendix.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: But Mr.Justice -- excuse me sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Do you say that now, is United Gas Line is that the regulated --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: United is 44% of its regulated, yes by the FPC.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And is that the one whose rate is involved here?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes, sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And you say that -- do you say that United actually had a cash out way of 52% for taxes?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes sir.</p>
<p>And I will go further than that.</p>
<p>I will say that under this record, it could not be treated in any other fashion because the only way, the FPC here undertakes to reduce that is to reach out beyond its jurisdictional power and seize unregulated oil loss.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: I understand your argument.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: I understand your argument, I'm just wondering as a matter of fact whether the losses which -- was a matter of fact in filing on a consolidated basis saved the regulated company any taxes?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Not a single penny.</p>
<p>They're filing on the consolidated basis of course Your Honor produced an amount of tax less than it would have been had all companies filed the separate return, that's a fact.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: But that was a saving to the parent that was a loss which only the parent could utilize only the parent could prepare the consolidated return, only the parent could offset the losses against the income and it was against consolidated income.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: I understand, now, let's carry it on a little more -- if United, the regulated company had filed separately it would've paid 52% and you say it wrote a check for that amount.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: To the Government or to the parent?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes, to the Government in my recollection to that --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And doesn't the parent pay the consolidated tax itself?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Of course, I think so.</p>
<p>I think so.</p>
<p>Now, how they did it actually in that situation --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: I thought mechanically they allocated that from consolidated return purpose --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: They allocate Mr.Justice as --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: I thought they took the total income and offset it by the losses of the group and the net result has the federal tax rate replied to it --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: May I --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And at that amount is then allocated back to the company, is that right?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: I want to answer that but I have to do it as I understand the situation.</p>
<p>As the regulations require each company in this group did actually prepare a return on a separate return basis and forward to the parent and the parent then combine as the regulations require the -- all of the income and all of the losses and allocated back or rather credited the losses against the income and the resulting income was that on which the consolidated facts was computed.</p>
<p>Now, let me go further because this is part of my understanding of answering your question.</p>
<p>They had to do an allocation as required by Section 1552 not point in a division among themselves but because the Government required that to determine the earnings and profits of each company free from any company transactions and of course that goes again toward the determination of whether or not the tax cost basis is reduced but there was no allocation in the sense of an allocation to determine a pro-rata part of responsibility for the consolidated tax.</p>
<p>Each participant --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But under the federal tax laws the regulated company in the, assume the out share of taxes.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: I'm not -- don't believe that that is necessarily correct, Your Honor that could be the case, that is not necessarily so.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Inaudible)</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: No sir, I don't think that's right.</p>
<p>I think the regulations require that each member be severally liable for the entire consolidated tax.</p>
<p>Now, of course they can't --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: How could?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: They can't get to it without doing what the regulations require and that they did no more and no less and in the combination of it of course the parent did take these losses and aggregate them and then apply them to the aggregate of the income.</p>
<p>I believe is that your -- does that answer your question Mr.Justice?</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Yes.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Well, maybe I misunderstood it.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Inaudible)</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Well, what I was trying to say was that if the FPC had done what it represents to this Court it must first do all of these losses would have been credited against unregulated income and there would have been nothing left for the Commission to do in computing United's income tax component includable in its cost of service but to use from the jurisdictional business its taxable income time 52%.</p>
<p>Now, from the very earliest days under the act, this Court has held that fundamental rate make rate making principles require separation of regulated and unregulated businesses in order to avoid the very jurisdictional transgression which the court below adjudged.</p>
<p>This is done in Panhandle Eastern versus FPC and Colorado Interstate versus FPC both the 324 U.S.</p>
<p>This principle is wholly consistent with the limited jurisdiction of Section 1 (b) of the Act, in its pipeline rate proceedings which are based on the cost of service method, the FPC determines rates for sales subject to its jurisdiction designed to recoup that cost of service consisting solely of a fair return on facilities used only to make the jurisdictional service and of the cost and expenses incurred only in the course of that jurisdictional service to ensure that this cost of service keeps within the act's jurisdictional bounds.</p>
<p>The FPC habitually and regularly separates out all non-jurisdictional sales and activities and they're accompanying income cost and expenses.</p>
<p>The FPC earlier comprehended applicability of these principles and the tax sale there as set out in its Mississippi River Corporation opinion for FPC 340.</p>
<p>In the city service case, it expressly declared applicability to this tax issue of a necessity to separate the unregulated from the regulated as the Tenth Circuit noted.</p>
<p>But neither in city service nor in this case did the FPC so separate though here it declared the record permitted separation of Union's taxable income between its regulated and unregulated but said this would make no difference because it said Union was in a taxable loss position for the representative period.</p>
<p>But Union's losses were non-regulated and non-jurisdictional losses and not then that tax loss of position does not substitute in my opinion for jurisdiction expressly denied nor did United by joining and filing consolidated return lose its separate entity nor the separate identity of its gas operations nor did Union lose the separate identity of its non-jurisdictional unregulated oil operations.</p>
<p>The tax regulations preserved the separate identity by defining consolidated income on which tax computation is made as a combination of taxable incomes computed separately for the members of the group as I have said each member of the United group for the representative period prepare to return on a separate return basis and deliver it to the parent corporation.</p>
<p>The parent being the only one authorized and so directed by the Code and applicable regulations combined and filed the consolidated tax return.</p>
<p>Of course, as the regulations provide each member is severally liable for the entire tax.</p>
<p>Thus, the parent's combination results in recoupment in that year instead of the eight years permitted by the carry back and carry over provisions.</p>
<p>The FPC took this consolidated tax liability a figure resulting after application of all non-jurisdictional and unregulated losses and divided that between United and corporation in the ratio that their respective taxable income bought to the consolidated income then it related the amount of consolidated tax so assigned to United, to United's taxable income to derive the 50.04%.</p>
<p>Thus, the 50.04% rate is a fiction, a contrive device under which United's jurisdictional customers improperly received the tax benefit of deductions from sources other than United's own operations.</p>
<p>This record indisputably shows the source of these deductions to be 3.8 of Union's net oil losses and the $24,000.00 from overseas.</p>
<p>The FPC's claim that this consolidated tax is a joint cost requiring allocation is in my opinion without cost.</p>
<p>A federal income tax results from application of a prescribed tax rate to a properly determined amount of taxable income.</p>
<p>United's taxable income has its genesis solely in United's own separate business operations as this true of every other member of the United Group.</p>
<p>United's taxable income does not derive in whole or in part from the joint use or operation by United on its affiliates of any facility or property.</p>
<p>The resulting tax liability of each member of United and each member of the group is a direct cost of each.</p>
<p>Allocation is a useful tool for the FPC to use to separate that subject to his jurisdiction from that which is not but allocation serves no function to identity United's taxable income for that arises only from United's operations.</p>
<p>Furthermore, the wisdom of the separation requirement is obvious from Union's operations.This uncontradicted record shows as I have said that Union's gas operations were taxable.</p>
<p>Its oil operations in a loss position but petitioner say that United customers in some fashion never identified contribute to Union's oil cost and hence I would be able to share in these so-called oil tax losses.</p>
<p>But FPC application of this separation principle shows this to be false.</p>
<p>In Union's FPC proceeding, the FPC by an allocation method of relative cost which it declared wholly adequate carefully strained out all possible costs, expenses and income from oil and other non-jurisdictional operations and activities so that there was left a rate based and cost of service restricted solely and alone to jurisdictional gas operations on which Union's jurisdictional rates were determined and approved including those covering its sale of gas to United.</p>
<p>So, Union's FPC approved rates which United pays contains no cost or expenses which give rise to Union's oil tax deductions.</p>
<p>The consequent impact on United and its jurisdictional customers are these forbidden focused on Union's oil situation will surely be rate instability rates rising or falling with Union's oil tax deductions and losses and without respect whatever to the continuation increase or falling of United's cost and expenses over all of these Union matters.</p>
<p>The FPC has no control in which United's customers have no interest and to which they make no contribution.</p>
<p>Petitioner say that the United group constitution in a greater system operated as one company with each member of the group acting as a department and that the parent's consolidated tax constitutes the taxes actually paid under the doctrine of El Paso versus FPC by the Firth Circuit certiorari denied.</p>
<p>But this reliance on El Paso strongly advanced the law as misplaced.</p>
<p>The Fifth Circuit obviously did not agree with petitioners or it did not discuss or cite El Paso.</p>
<p>El Paso on the other hand refutes this claim and is utterly and clearly distinguishable.</p>
<p>First, it had no consolidated effective tax rate issue.</p>
<p>Second, El Paso made no attempt to reduce gas rates through utilization of El Paso's oil department operations.</p>
<p>This is the one corporation when some question was asked by the FPC regulates and they are department but here they made no effort to utilize the oil department losses operations.</p>
<p>Third, the FPC and El Paso capital has separated out all oil and other none utility operations including that tax consequences leaving only jurisdictional gas operations or the tax expense in El Paso reflect its statutory depletion and intangible drilling allowance relating solely and only to natural gas operation.</p>
<p>As I read the El Paso, it's clear that FPC authority over tax deductions is restricted to jurisdiction of gas operations of the regulated company.</p>
<p>But petitioners further argue that the United Group can achieve the benefits from consolidated tax procedure because the regulated monopoly of United guarantees a profitability that will always permit full advantage to absorb Union's tax losses.</p>
<p>Aside from the fact as we shall show that Union can utilize its own tax losses and that the parent corporation either can utilize such tax losses against its own income or to be extent Union does not so utilize with separate reduction of its tax cost basis.</p>
<p>The regulated monopoly and guaranteed profitability concept pointed to 44% of United's jurisdictional business we -- are 44% of its total business we deem to be unsound.</p>
<p>The FPC policy of the lowest reasonable rate which is again been voiced here this morning and this concept of guaranteed profitability are mutually inconsistent.</p>
<p>The concept is further destroyed by Union's ability to take care of its own losses.</p>
<p>It would have a period of eight years, three back and five forward under the carry back, carry forward provisions.This record shows that it can utilize that and use its own tax losses.</p>
<p>Now, this record when this Court gets to it will show if the Court please.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Excuse me.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: That -- pardon me sir.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Excuse me.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Let me finish this sentence would you please sir?</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Surely.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Would show that this testimony was not cross-examined and it was not disputed from any source.</p>
<p>Now sir.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: I thought the facts in this record show that of the five-year period take there was only one year and which Union showed any profit at all.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: I believe that's correct, Your Honor --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: That was very small --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: -- 1958.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: -- $24,000.00 or $25,000.00 or something or --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: No, sir.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Do I have overseas in my?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes.</p>
<p>Union in 1958 as I recall it, it had any excess of considerably in excess of $4 million taxable income.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: And the losses average over the four-year period how much a year?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Over the five-year-period the net tax loss of Union was $3.8 million.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: So that on this record, on the facts of this record it's a little hard to be sure you can't do more than speculate as to whether or not Union actually could of taking itself advantage of the carry back and carry forward provision.</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Well, their witness Your Honor testified that he had had a study made and he had found that they would unquestionably be able to utilize their own tax losses.</p>
<p>Now, what that study was the record don't reflect, he was not cross-examined about it and there was no contrary evidence it was put in to the record.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Well, there's no question about it as a matter of law, they're being able to do it if there were profits against wish to take --</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: Yes sir.</p>
<p>I think --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: That depends upon questions of fact?</p>
<!-- Thomas_Fletcher--><p><b>Mr. Thomas Fletcher</b>: That's correct sir.</p>
<p>That is correct.</p>
<p>And the record you have correctly stated here what the record show.</p>
<p>Now, at the FPC level to commissioner's dissent in both City Service and United on the ground (Inaudible) that the so-called three step allocation appropriated losses which derived from expenditures in non-jurisdictional business activities finance not by the regulated gas company's customers but rather by stockholders so that it had the effect of regulation by the commission of non-utility enterprises beyond the commission's jurisdiction.</p>
<p>Both the Fifth Circuit in this case below and the Tenth Circuit in City Service found that such three-step formula that the FPC device did appropriate this non-jurisdictional unregulated unrelated tax losses and that that resulted in a violation of the jurisdictional limits which Congress wrote into the act, a transgression already declared by this Court in Panhandle.</p>
<p>In this case, the FPC confesses that the formula does appropriate the whole of those non-jurisdictional unregulated losses.</p>
<p>Thus, it is that the decision below in my opinion is not only right but which it merits affirmance but the FPC confesses that rightness on the specific ground adjudged.</p>
<p>It is accordingly respectfully submitted that the decision below should be in all things affirm and it is so respectfully pray.</p>
<p>I'm grateful to the Court.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr.Brackett.</p>
<p>Argument of William W. Brackett</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: If the Court please, I'd like to start by referring to a question by Justice White relative to actual taxes in what United the regulated company actually does.</p>
<p>The fact is as Mr.Fletcher summarized that United reports on its separate return which is consolidated then by the parent, a 52% tax liability and does in fact pay a check which is transmitted to the federal government for that 52% liability.</p>
<p>In fact, the reason that this case is here is that the Federal Power Commission objects to the inter-company transaction to the way and which the company files and pays the tax does not believe that this actual tax as we submit it is, is properly applicable to the United, the regulated company here and therefore has attacked in the rate regulation.</p>
<p>I'd like to without too much repetition I hope stress three facts.</p>
<p>Number one, under the Federal Power Commission method here in question it is Union's non-jurisdictional oil losses which cause the reduction in the rates of the jurisdictional portion of United.</p>
<p>Now, this is key to this case.</p>
<p>We do not have a case which it is the gas operations of Union which have losses and therefore the El Paso case which has been referred to is wholly irrelevant here.</p>
<p>It is new fact non-jurisdictional oil losses of Union which are being carried over.</p>
<p>Now, this fact is not disputed.</p>
<p>Staff counsel of the commission level conceded that it was a use of oil losses and that shown in the record, volume 1, page 120.</p>
<p>In fact, it is only oil losses.</p>
<p>There are no gas losses and this is pointed out in exhibit D of United's brief beside the appendix to United's brief which is supported on the record.</p>
<p>And the Commission has conceded in its opinion below in this case is possible to separate the two parts of Union between gas and oil.</p>
<p>And as I've indicated it is the oil losses.</p>
<p>Now, Justice White asked at one point, is it possible for a regulated company to have a loss?</p>
<p>It is of could well have and then in some of these years the gas portion of Union had some losses for tax purposes.</p>
<p>But over all, over the representative five-year period, it did not so we are dealing only with none jurisdictional oil losses.</p>
<p>Secondly, I'd like to make clear that the FPC method used all of the tax reducing results of the losses of Union's oil operations to reduce the rates of the profit companies.</p>
<p>That means the FPC jurisdictional portion of United, the non-jurisdictional portion of United and of the parent company.</p>
<p>There was no sharing of this tax benefit between the loss companies which produced the losses which made the tax reduction and the profit companies.</p>
<p>Number three, the Court of Appeals below and the Court of Appeals in the city service case which the FPC did not attempt to appeal held that there was a jurisdictional violation again there was not a holding that no allocation is possible, there was a holding that the allocation method applied in this case which was all it was before the Court of Appeals was a jurisdictional violation because it took the oil losses and gave all of the benefits to the profit companies including the regulated portion of United.</p>
<p>The Court of Appeals also did not hold that this was a violation because Union, the oil and gas producer was unregulated company or because it was unrelated to United.</p>
<p>They held it's clearly and wholly on the jurisdictional point that oil losses could not be taken across.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Mr.Brackett, the point you -- Section 1552 says that pursuant to the regulations prescribed by the secretary the earnings and profits of each member of an affiliated group required to be included in the consolidated return shall be allocated and in accordance with one of four different methods available.</p>
<p>Now, anyone could read those sections then it requires that you chose the -- not that you want to allocate the tax liability and if you don't choose why it's by 1552 (a) (1) I gather.</p>
<p>Now, how in this case or was the choice made of allocating the tax liability under Section 1552?</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: The choice as far as the Section number eludes me but it was done by a method which allocated 52% of the separate company taxable profit of United to United.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And so that it must -- that is not one of the way that it's expressly listed but so it must have been under four, the tax liability of the group shall be allocated in the court of any other methods selected by the group.</p>
<p>In any event, the actual check to be wrote print to the United States was 52%.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: The actual check which united wrote for its --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Would you concede for the moment that an allocation could have been made consistent with Section 1552 which would have reduced the actual tax cost to United below 52%?</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: It is my understanding of that Section which I do not consider controlling that the answer of your question is yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: I understand, so that the 1552 would've permitted.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: It would've permitted it.</p>
<p>Now, if that method which did as you state will set result had been then used for rate purposes.</p>
<p>It's my contention that it would've violated the jurisdictional power of the Federal Power Commission.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: So, it wouldn't make -- you would make the same argument no matter what the method of allocation?</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: Yes Your Honor, I do not rely on the earnings and profits allocation method on the Internal Revenue Code.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And would you say that is it permissible for us to think about this case in terms of a single company that has both regulated and unregulated business and they were unregulated business having losses and the regulated business having profit?</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: It's permissible --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Is that a decent model with this to --</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: It is if we refine it a bit.</p>
<p>We have to add certain facts.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, go ahead.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: Number one, is the regulated portion regulated by the FPC and I'm sure that you used the term to mean that it is.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: It is.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: Now, in that case, then we have essentially a recreation of the El Paso case has been referred to in the Fifth Circuit and in that case, the Fifth Circuit held that the losses could be carried over because it was gas losses which were also subject to the FPC's jurisdiction.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, let's assume the FPC regulated portion is that you say that the unregulated portion is an exploration, the exploration operation and there are intangible drilling costs and its producing operation and there is consequently depletion.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: Alight, then the unregulated portion is not subject to the Commission's jurisdiction and in that case I would say that the result should be the same as we urge here.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Even though, the company predictably would pay no tax at all.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: You're saying now -- in other words, you're going again to your point of does the fact of the check control.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: No, I'm saying that if it's all one entity and predictably there are going to be sufficient intangible drilling costs over a period of the years to reduce the tax of this single entity to zero every year predictably and everybody agreed, they'll pay no tax for the next 10 years.</p>
<p>You would say on your argument nevertheless and nevertheless that the rate structure of the company should be set to reflect a tax cost of 52% of the regulated companies or regulated divisions earning.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: The answer of your question is yes, because the results of the regulate portion do in fact increase the -- either decrease the refund or increase --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Voice Overlap) I think I'm clear enough now what the --</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: -- or increase the liability by the amount of 52%.</p>
<p>The non-jurisdictional portion should not be brought across.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: So, the tax saving which I mean you would say the rate should remain high enough to permit a return to the company after a tax cost which the company does not have because of losses in unregulated portion of the business and that the tax saving is -- which is in cash, in cash in hand is available to go on to finance unregulated activity.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: The answer is yes because the contrary answer would violate the well-known regulatory principle which I suppose was stated most clearly in Justice Douglas Panhandle opinion that you cannot use non-jurisdictional results to reduce jurisdictional rates.</p>
<p>Now, the converse of this is that the jurisdictional rates are not increased by the fact of losses of the non-jurisdictional companies.</p>
<p>These are kept separate statutorily and regulatory.</p>
<p>Now, the Federal Power Commission --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Inaudible)</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: You mean enter into a consolidated tax return?</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Inaudible)</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: To keep them separately completely as you're stating I have take it Justice -- Mr.Justice White.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Inaudible)</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: They are mixed only in a sense Mr.Justice White of having been joined by a cover sheet in the consolidated tax return but the components which produced that net consolidated tax are perfectly clearly computable and are separately cost by the separate operations of the various companies.</p>
<p>Now, FPC in its brief really admits that the Commission aired in its opinion Number 428, Mr.Justice Stewart referred to these admissions and the petition for certiorari at page 10 they stated that there may indeed be problems if the entire savings from the regulated losses are allocated to the profit companies.</p>
<p>And then at page 15 of their brief, they admitted that this in fact occurred that the whole of the losses were taken and applied against the profits of the profit companies in this case, the regulated company, United and the other companies.</p>
<p>This Court really need go no further than this admission.</p>
<p>There was no sharing between profit and loss companies and therefore no party to this case is supporting the FPC decision as it was written.</p>
<p>What the FPC and Memphis are doing are supporting an alternative method which they say the Commission could have used but did not in this case.</p>
<p>Now, the Federal Power Commission --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: We'll recess now.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: Thank you, Your Honor.</p>
<p>If the Court please before the noon recess, I think I hope I established that the losses which the Federal Power Commission is taken into effect to reduce the jurisdictional rates of United are losses of the non-jurisdictional activities of the affiliate union and that the Federal Power Commission has admitted the jurisdictional violation that the method which it used in this case and the only method therefore that was before the Court of Appeals that is not before this Court does violate jurisdictional power.</p>
<p>The Commission however, implicitly suggests in its brief that there is some other method which would not violate the Commission's jurisdiction suggests that this method might be by using some of the oil losses allocating others to the loss companies.</p>
<p>Although it's irrelevant and not in this case I'd like to touch on that because analytically it goes to the questions which have been discussed by the other parties.</p>
<p>In the first place, this use of these losses would also be a violation even if there was only a portion of the losses because it crosses the jurisdictional boundaries and the same principles applies, it's not a quantitative principle, it's a question of what is the source of the loss.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: So, just to make it clear, if on a consolidated return there was no consolidated that income and hence no tax to be allocated or paid by anybody and predictably that would be true for future.</p>
<p>You would say that nevertheless the regulated company should be allowed 52% tax credit for making it (Inaudible).</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: I'd like to answer your question and perhaps the assumption, the answer of your question is yes.</p>
<p>We look to the jurisdictional company and the income and expenses which produces.</p>
<p>I do not understand Mr.Justice White what you mean by predictably.</p>
<p>In this case, we have a corporate system in which United is 44% regulated by the FPC, 56% is not, the parent company is not --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, I can understand you could make an issue on whether or not the FPC correctly concluded that the -- that there would or wouldn't be losses or would or wouldn't be income but that's the factual determination I suppose but let's just assume the you could predict that there was going to be no consolidated net income for the next 10 years and everybody admits to assume everybody agree to that, you would still say that you're entitled to tax.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: In those facts which do not pertain here the jurisdictional principle nevertheless cuts across.</p>
<p>Now, in addition to the fact that the Commission's attempt to support a method which was not used here as wrong in principle.</p>
<p>There is also the fact that the Commission has made a second admission and I think Mr.Justice Harlan's question this morning went to that point.</p>
<p>He asked, why did the Commission in its City Service opinion and then again in this United opinion here rejects its own steps proposed method.</p>
<p>Let me state the fact, the fact is that the staff said that these tax losses from non-jurisdictional sources should be spread evenly across the profit companies irrespective or whether they are profit companies are regulated by the FPC or not.</p>
<p>In other words, to the jurisdictional portion of United the same as to the non-jurisdictional portions of any company and therefore that it would be an even spreading.</p>
<p>The Commission rejected this and stated as its principle that you must first offset the none jurisdictional losses against -- I'm sorry, they determined the use was none regulated losses against none regulated income and that only the excess could be carried over against the regulated companies.</p>
<p>Now, --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: (Inaudible)</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: These were the categories of the Commission used, yes Mr.Justice Harlan.</p>
<p>Now, it seems to me that this is a recognition of the boundaries which could be crossed only but instead only a partial recognition so that they only went part way in acceptance of the jurisdictional principles because as I stated previously crossing the jurisdictional line with apportion of the losses is also a violation.</p>
<p>And it seems to me clear that in fact in formulating their regulated non-regulated categories of the companies in such a way as Mr.Justice Harlan has suggested in such a way as to ignore the FPC jurisdiction and to sweep in to the regulated category companies which are regulated by any regulatory agency.</p>
<p>The Commission inevitably set up a method which ignores its own jurisdiction because they lump together as in the regulated category companies which are and companies which are not and portions of companies which are not regulated by the FPC.</p>
<p>It also points up the facts that had the Commission in this case followed the theory which is set forth of offsetting non-regulated losses against rate and non-regulated games.</p>
<p>Had they followed that method but have they utilized the definition of regulated which followed their own jurisdictional limits then the non-regulated losses from the oil operations of union would've been fully used up by offsetting them against the gas operations of union -- I'm sorry, against the non-regulated gas operations of United and non-jurisdictional portion which were sales and intrastate commerce or even more clearly by offsetting them against the parent company's income which again was not subject to the Federal Power Commission jurisdiction.</p>
<p>So, on this basis, the income of the jurisdictional portion of United was not necessary to offset the losses from the non-jurisdictional oil operations.</p>
<p>Therefore, we have two violations and the result of these violations is to produce a number of anomalies and inequities and regulation.</p>
<p>Number one, the jurisdictional customers of United did not pay for the expenses which incurred the losses of union's oil operations.</p>
<p>Federal Power Commission in allocating cost clearly allocates in this case United and union are not even regulated in the same rate cases.</p>
<p>So, there is a separation and yet we have the anomalous situation that when the union suffers losses and therefore the system suffers, United's rates are reduced.</p>
<p>This not only mixes the jurisdictional and the non-jurisdictional impermissibly but also is even reasonable that when one subsidiary loses the other must have lower rates.</p>
<p>The stockholders on the other hand of the company and in this case apparent company do provide the capital and there, the losses which produce the tax benefits in this case.</p>
<p>Now, petitioners make a point of saying that it's the profits from United's gas operations which provide the capital is simply is not correctly analytically when united is a profitable company, it does so on a regulated basis with regulated rates and any funds which are provided to the parent company are dividends and if they stay with the parent company where capital experience and purposes of any company in the system it is simply because the stockholders have waived their right to take them as dividends.</p>
<p>Therefore, very clearly that capital is provided by the stockholders.</p>
<p>They take the risk of the loss company, the only equitably basis would be that they also achieve the tax benefits when the risked companies have losses and therefore produce tax benefits.</p>
<p>This is most clearly I think brought out in this case of a minority stock holder of the loss company.</p>
<p>Let's assume that the loss company in the system has minority stockholders.</p>
<p>Minority stockholders have no of the loss subsidiary, have no influence on the activities of the other affiliates in the system.</p>
<p>They do not produce the situation and which there is regulated profit to offset.</p>
<p>They do not achieve any of the games from the regulated profits and yet under the FPC system the tax benefits are taken away from the loss subsidiary and the parent because they're translated over into rate reductions of regulated company.</p>
<p>Again, this is neither jurisdictionally valid nor good regulatory sense.</p>
<p>I might point out incidentally that when the losses of the loss companies are used in a consolidated basis, the parent's basis for tax purposes games or losses is reduced, the basis in the subsidiary.Therefore, these losses suffered whether their real losses as petitioners like to refer to it or tax deductible losses of Mr.Justice White pointed out very clearly and tangibles are quite real.</p>
<p>In any case, these -- the basis on the subsidiary is reduced and therefore there's a real tangible loss produced by the losses.</p>
<p>There is also a discrimination against companies which have a regulated affiliate produced by the FPC method.</p>
<p>A oil company cannot explore and compete on an even basis when another oil company if the former company has a regulated affiliate because it knows that its tax cushion, the tax offset which Congress granted it when it has losses will be taken away in the form of lower rates to the affiliate.</p>
<p>Therefore, there's a discrimination against the risk company which has a regulated affiliate.</p>
<p>And it seems to me that this is clearly a frustration of the congressional intent in the passage of the consolidated tax provisions which were to treat multi-corporate systems on the same basis single cost to company systems.</p>
<p>In this case, the incentive to take risk is destroyed by the fact of consolidated tax benefits are translated into rate reductions of the regulated company.</p>
<p>I'd finally like to point out that reversal of the FPC decision in other words, the affirmance of the Court of Appeals decision by this Court does not have the effect of raising FPC rates beyond their normal level.</p>
<p>It simply leaves the rates if the level that they have historically been and it does not reduce them instead it allows the tax offsets granted by Congress to the parent company to remain with the parent company, the parent company with stockholders being those who bear the loss of the risk of the loss operations.</p>
<p>The FPC's basic premise is that we are dealing here with the joint cost and I submit that we are not dealing with the joint cost, we are dealing with consolidated tax liability which is separately incurred.</p>
<p>It is nothing more than the sum of the allocate parts and the portion of the consolidated tax which is produced by the regulated company is the sum of its own income and its own expenses similarly the tax saving that's referred to into this case is produced by the losses suffered by the non-jurisdictional operations of the oil company and this is also separately traceable.</p>
<p>The general principle is that if you can assign the results of a regulatory act you do not allocate and this case it's quite clear that you can trace the cost of the losses, the non-jurisdictional operations and therefore, there is no necessity to allocate the tax.</p>
<p>The basic claims of the petitioners are practical arguments that there is a close relationship between the operations of the union and United.</p>
<p>What they fell to point out is that almost everyone of their claims some of them are factually inaccurate but even assuming arguendo that they were accurate almost all of their claims go the gas operations of union and that is not the operation which has the loss.</p>
<p>It is the oil operations and they are not closely related in any way even if related this way relevant factor.</p>
<p>Basic summary of this case then is I think that all parties agree that the method used by the Federal Power Commission in this case is in error.</p>
<p>The concessions of the FPC brief make that clear.</p>
<p>Therefore, we are dealing with the question of whether this Court should reverse Court of Appeal reinstate the Federal Power Commission decision which is not supported by either the Commission or the respondents.</p>
<p>Second step would be if we were to go beyond that point whether or not the Federal Power Commission could in some other case shape a jurisdictionally valid system.</p>
<p>I submit that I've shown that they could not.</p>
<p>If the Court reaches that question then we must deal with the jurisdictional violations but that is not the decision of the FPC in this case.</p>
<p>I thank the Court.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Where is the concession that you spoke of which would bring all parties into agreement on the fact that this is the -- that Commission was in there.</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: The concession which I deal with Mr.Chief Justice is at page 10 of the petition for certiorari of the Federal Power Commission and at page 15 of the brief of the Federal Power Commission in which the Commission states that there are indeed problems jurisdictional problems with a system which allocates the entire loss of benefits to the profit companies rather than splitting them sharing as they say between the profit loss companies.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: That's the language of Mr.Fletcher quoted in --</p>
<!-- William_W_Brackett--><p><b>Mr. William W. Brackett</b>: I believe Mr.Fletcher quoted it in Mr.Justice Harlan referred to it (Voice Overlap).</p>
<p>One final point, I find that I reminded by Mr.Fletcher and yes, we're both reminded by her associates that I made a misstatement with regard to the -- an allocations under 1552 (a) which as I stated were irrelevant but used only for purposes of earnings and profits.</p>
<p>The method used is not invariably assigned 52% of the tax to United and the tax payment follows the 1552 method so that in some years it's 52% and some that is not for the five-year period in question I find it was 49%.</p>
<p>I was not informed at the time and I apologize to the Court for the statement.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Very well.</p>
<p>Mr.Wahrenbrock.</p>
<p>Rebuttal of Howard E. Wahrenbrock</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: In the few minutes that I have, I think I can make two points that maybe of some assistance (Voice Overlap) --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Are you going to thing to think about concession, is that you made?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: I haven't felt that more was called for but it runs I may say to so far as the so-called concession in the petition for certiorari runs to the possibility which I think is faced in every case in which an allocation has to be made that the application of that allocation of that method of allocation in new cases as cases come along may present problems.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Inaudible)</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: No.</p>
<p>In this case, there is no question as to the method of allocation before the Court but only as to the power to make an allocation and the method of allocation that some of the methods, some of those problems it's easy to speculate may arise but before the court below and before the -- and the Tenth Circuit there was no decision, no criticism of the Commission's method of allocation.</p>
<p>Many of the statements that are questioned about the Commission's method of allocation ran to division between regulated and non-regulated business.</p>
<p>That wasn't passed on by the court below, wasn't passed on in the Tenth Circuit.</p>
<p>What was said was what was held was the Commission does not have power to allocate a portion of the consolidated return tax reduction to among the taxable income companies so that the regulated company gets a share of that.</p>
<p>Now, --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, what does this mean that if you would've prevailed on the question of power which has to provide for consideration of the matter?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: It had the consideration of the method.</p>
<p>There has been no decision on that.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But is it a question of (Voice Overlap) --</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: We would -- I would question whether that question was preserved in -- so that it could be, so that review could be sought of it.</p>
<p>Natural Gas Pipeline came the closest to preserving the question.</p>
<p>But Natural Gas Pipeline's only interest is that of a customer and as it says in its brief its interest is in reducing rates.</p>
<p>And this is a reduction that it's attacking and under this Court's decision, Justice Harlan's opinion in the Phillips case, the second Phillips case holding that suggesting that Wisconsin could not object to the spiral escalation clauses because Wisconsin did not -- it was other way around, California could not object to the spiral escalation clauses because they affected only Wisconsin if California was not agreed.</p>
<p>Though we say natural has not agreed then natural's reservation of a question would be (Inaudible).</p>
<p>In other words, there may be questions on remand of the court below whether anybody can raise this question at all if certainly it wasn't passed on.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: In any event, we don't have some of that year assuming that you (Voice Overlap).</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Right.</p>
<p>That's right.</p>
<p>Now, this suggestion of -- well, I was going to point out on the 49% versus the 52% but Mr.Justice White had asked about our brief on page 25 at note 26 gives the record references and on the percentage that was actually allocated by United for tax purposes, if Your Honor please, and the method of allocation is explained on page -- on the joint appendix page 33 and 34.</p>
<p>The method of allocation is described.</p>
<p>The --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And that this, what you're talking about is the amount of tax actually paid.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: It's the amount that they among themselves --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Voice Overlap)</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: -- allocate for the tax purpose of determining whether they are operating at a profit or a loss, profits and earnings for tax purposes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Yes, but who paid the tax?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: The tax, there is only a single tax paid and that's the problem that recalls for the allocation with --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But whose check was it?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: I'm sorry?</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Whose check did the government get?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: The record citation that was given for that does not disclose who wrote the check.</p>
<p>It does say that this company wrote a check for the amount that was allocated to it by this method that I have given you the citation for.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Wrote the check to whom?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: It says that the check was written to the government but that couldn't be a check for the payment of the total tax because of (Voice Overlap) --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: It's not a total tax but why wouldn't each company write a check for each year of the tax?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Because there is a single tax liability for which the parent corporation is responsible for filing a return and seeing that it is paid.</p>
<p>Now, I suppose it can handle two checks of five checks or 10.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, could you explain this to me?</p>
<p>Section 1552 permit an allocation of tax liability back to the companies in anyone of several way --</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: -- and with the consent of the secretary --</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: That's for tax purposes for determining that's what 1552 is talking about.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, I'll just say for purpose of 1552.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: It allows the allocation back to the companies of tax liability and one of the ways in which it could allocated is to allocate back to this regulated company, here is 52%.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: But that is not the method that they did follow.</p>
<p>That's right.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Just wait --</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Alright.</p>
<p>Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Let's assume for the moment that that is precisely what the company's did they allocated back to United the regulated company 52%.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And that the United out of pocket cost for taxes regularly and consistently is 52% of its net income although 1552 would permit a different allocates.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes, I understand your question and I think --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Now, what business of the FPC got and say that what to repeal this part of 1552?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes.</p>
<p>The answer grows out of such a long history of the Federal Power Commission's no profits to affiliates rule that I had not realized that was involved.</p>
<p>These -- such a payment represents an adjustment among --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Voice Overlap) answering -- just answer against his background, 1552 -- 1501 doesn't require consolidated parent.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: That's right.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Now, these companies could've returned their income separately.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And united would've paid 52% of its net income and tax.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And the Federal Power Commission would have recognized and a tax allowance is 52% even though a consolidated return was permissible.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Possibly but I'd like to put it --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Possibly enough, let's get to --</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: I'd like to give you the caveat on that.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Let's get back straight.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Possibly, if the Commission could find upon the facts which on review were found sufficient to support its finding that as a matter of prudent management the affiliated group should have saved the utility taxes by filing a consolidated return then the Commission might find that they had not acted prudently and in incurring the 52% tax loss.</p>
<p>Now, this is purely hypothetical but I want to explain my caveat in answering you.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: So, you would say -- what you would say the commission in a -- would have power to require either the filing of consolidated return or a result equivalent to a consolidated?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes, sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: And that if a consolidated return is filed, the Commission has the power to select the method of allocating tax liability even though it restricts the choices open under 1552?</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: I would like to answer yes and qualify it immediately by saying it would not have that effect because what the Commission allows in determining cost of service is not controlling on what the companies may do for their other purposes.</p>
<p>Now, we are dealing here with one of an affiliated group of corporations and the Commission will not allow one company that is a member of such a group to pay as a tax, a payment of 52% when as a matter of fact the group does not incur a liability.</p>
<p>52% of which is properly allocable to the regulated company.</p>
<p>An affiliated group cannot by virtue of their 100% affiliation settle the regulated company with more cost than the group is actually incurring upon behalf of that company.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Well, that's your position.</p>
<!-- Howard_E_Wahrenbrock--><p><b>Mr. Howard E. Wahrenbrock</b>: Yes.</p>
<p>Thank you.</p>
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Thu, 23 Aug 2012 18:10:11 +000068308 at http://www.oyez.orgF. P. C. v. Tennessee Gas Co. - Oral Argument (incomplete)http://www.oyez.org/cases/1960-1969/1962/1962_48/argument
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<a href="/cases/1960-1969/1962/1962_48">F. P. C. v. Tennessee Gas Co.</a> </div>
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Transcript:&nbsp;</div>
<p>Argument of Ralph S. Spritzer</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: This case is here on certiorari to the Fifth Circuit involves an order of the Federal Power Commission entered in a Section 4 rate proceeding under the Natural Gas Act.</p>
<p>It raises the question and I shall state it very broadly at the outset in seek to refine it later, whether the Commission is authorized to dispose of a portion of a rate case in order to relieve consumers immediately of some of the burdens of excessive charges.</p>
<p>In advance of its disposition of the entire proceeding, the rate proponent here, the respondent, Tennessee Gas Transmission Company, is an interstate pipeline extending from Texas and Louisiana, its southern extremities to the New England states at the northern, doing business in some 16 states.</p>
<p>As an interstate company, as Your Honors know, it is obligated to file its tariffs with the Federal Power Commission.</p>
<p>Commission regulations further require that any filing for increased rates and this is an increase rate proceeding shall be accompanied by a full supporting statement as to the costs of service which are relied upon as justification for the company's proposed rates or charges.</p>
<p>It's to set forth for example the cost of its purchase to gas, the cost of labor, supplies, its estimate as to the taxes it will pay, estimated depreciation allowance and its claim for fair return on its net invested capital.</p>
<p>Now, upon the filing of the tariffs then the supporting statements, the Commission is empowered in its discretion to suspend the rates and to enter upon a hearing as to their lawfulness.</p>
<p>This suspension is limited to five months duration.</p>
<p>Thereafter, the company may make the increases effective even though the hearing has not yet been completed.</p>
<p>In that event, however, the company has an obligation under the statute to refund any portion of the increase ultimately found not justified, as well as to adjust its rates prospectively to whatever level may be prescribe by the Commission.</p>
<p>One further aspect of this statutory scheme, there is emphasis in our view.</p>
<p>If I may refer the Court to pages 48 and 49 of our brief where Section 4 (e) is set forth.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: What page is that?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: I'm looking now at the middle of page 49, Your Honor.</p>
<p>The last four or five lines of the section provides at any hearing involving a rate or charge sought to be increased.</p>
<p>The burden of proof to show that the increased rate or charge is just unreasonable shall be upon the natural gas company and the Commission shall give to the hearing and decision of such questions preference over other questions pending before it and decide the same as steadily as possible.</p>
<p>Now, this last as not always so easily accomplished.</p>
<p>Tennessee actually filed the increases, which are involved in this proceeding in October of 1959.</p>
<p>When those increased rates were filed, they were already pending before the Commission two prior sets of increases; one, which had been filed the earlier in 1959, the other filed back in 1957.</p>
<p>Both of which were themselves that that stage in the toils of the administrative process.</p>
<p>I suppose you might visualize the situation in terms of a stairway consisting of three steps.</p>
<p>The floor from which these steps ascend might be said to represent the rates as they existed in 1957 when the Commission had last approved a set of Tennessee rates.</p>
<p>The first step upward represents the increases for which the company filed in 1957 that same year.</p>
<p>The second step, the increases for which the company filed in May of 1959.</p>
<p>The third step, and that refer -- and that's the proceeding that is before the Court immediately at this time.</p>
<p>The increases which is I indicated earlier were filed in October of 1959.</p>
<p>The difference incidentally in the yield produced by the rates at the floor level and the yield which will be produced at the level of step 3, computed in terms of relatively current gas sales amounts to that $75 million a year.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Spritzer, may I ask what happened to those first two steps?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: They are still in administrative proceedings, Your Honor, and I'm going to refer during the argument to the chronology of these various cases because they do bear some relationship.</p>
<p>We have asked that -- that they'll be distributed to the Court a chronology sheet which I think may make that easier to follow.</p>
<p>As this thumbnail sketch of the three pending rate dockets does suggest, one of the facts of life with which the regulatory commission has had to deal.</p>
<p>And I think in recent days, they're making various strenuous efforts to find ways and means to deal with it, is that the capacity of the natural gas company to file new sets of rates may tend to outstrip the capacity of the agency to dispose of these large and complex cases.</p>
<p>And I think that brings us closer to the core of this case for the procedural device which the Commission has employed here is one which it is utilizing in this and in other pipeline rate cases in an effort to provide more promptly to consumers a measure of relief from the burdens of rates which are found to be excessive.</p>
<p>Now, the rates of the pipeline company are aggregates.</p>
<p>By that, I mean, that numerous elements enter into the cost of service.</p>
<p>As I mentioned a little earlier in speaking of the supporting statements, which a pipeline is required to submit with its filing, there are various components, how much is the pipeline paying the producer for the gas, which it purchases and it sends on the customer companies?</p>
<p>What is the estimate of its annual payroll?</p>
<p>What will it need for taxes and depreciation and for fair return on investment?</p>
<p>Now, some of these items may well be uncontroverted in a particular case, others will be challenged by various parties to the proceeding.</p>
<p>Characteristically, some of these issues are great complexity and require many weeks or even months of testimony, a protracted battle of the utility experts.</p>
<p>Others will admit of more expeditious treatment.Suppose that the Commission concludes in a particular case that it may take two or more years to dispose of one these large rate cases in its entirety.</p>
<p>But that one or two controverted issues, issues, which perhaps involved a substantial portion of the cost which are seriously disputed are susceptible of separate and much earlier disposition, can the Commission decide the one or two issues accepting for purposes of its interim decision, the remaining claims of the company assuming their correctness for the time being.</p>
<p>In other words, if it finds that the certain elements which it have examined, certain elements of the company's claim have been overstated, can it, to that extent order refunds for the past and more important late reductions for the future?</p>
<p>Now, as I understand our opponent's brief here, Tennessee is not urging a categorical no to that question.</p>
<p>Rather, it seems to say that perhaps sometimes the Commission might do this but not in this case.</p>
<p>Well, what precisely did the Commission do in this case?</p>
<p>The increases which Tennessee proposed in October 1959, were predicated in large part upon a claim that it was entitled to a 7% overall rate of return on its net invested capital.</p>
<p>This was in contrast to the 6% rate which the Commission had allowed Tennessee in its last completed rate case.</p>
<p>Now, the hearings in this case began in February of 1960.</p>
<p>The course so that it shown by this chronology sheet in the right-hand column.</p>
<p>Tennessee at that hearing presented its direct evidence, its witnesses within cross-examined exclusively on the issue of rate of return.</p>
<p>Thereafter, the Federal Power Commission staff and those of the interveners who wished to do so, presented their testimony on that same issue of rate of return and their experts were cross-examined.</p>
<p>Finally, Tennessee presented its rebuttal on rate of return.</p>
<p>When all of the evidence tendered on this issue was in the record, staff -- Commission staff counsel moved, this was in May of 1960, that the proceedings be divided into two faces.</p>
<p>One, determination of a proper rate of return for this company, two, determination of the remaining cost of service issues in the case.</p>
<p>He further proposed that the examiner's decision be omitted and that the Commission proceed to decide this issue directly.</p>
<p>The Commission adopted this procedure over Tennessee's objections.</p>
<p>And after hearing oral argument on the issue of rate of return, wrote an opinion in August of 1960 in which it found that 6 1/8% would be a just and reasonable return for the company.</p>
<p>By its order, which is the order here under review, the Commission did three things.</p>
<p>One, it disallowed the rates computed by Tennessee on the basis of the excessive 7% rate of return.</p>
<p>Two, it directed Tennessee to file substitute rates, such rates to be effective as of the time the disallowed rates had originally gone into effect which would yield 6 1/8%.</p>
<p>Three, it ordered Tennessee to refund to its customers the amounts which had already been collected in excess of the prescribed interim rates.</p>
<p>In its opinion, the Commission pointed out that by permitting Tennessee to file substitute rates based on a proper rate of return.</p>
<p>But otherwise, based in every particular on the company's own claims as to what it was entitled to, Tennessee would be placed in exactly the same position that it would've been in if it had originally filed increased rates predicated upon a proper allowance for this rate of return factor.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: The effect of this was the seller agent, both have ordered refund to this --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes.</p>
<p>But more importantly, I think, it would relieve the consumers of the continuing burden of paying the higher rates which the Commission at this point had found to that extent unjustified.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: Mr. Spritzer, may I ask you, do you have the allocation that the commission used (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes.</p>
<p>The company under the Gas Act has the initial responsibility of proposing rates, and that means rates for all customers wherever situated regardless of their class of service.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: How about the imposed rates in the first case imposed by Tennessee in the net allocation between those rate cases?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes.</p>
<p>Actually, the allocation I would say Your Honor, is an element which enters in to the rate when the company files it.</p>
<p>It must consider the situation of all of the customers who were being served.</p>
<p>Now, before the Fifth Circuit, Tennessee challenged both the Commission's determination that the 6 1/8% was a proper rate of return and the Commission's authority to give immediate effect to that determination.</p>
<p>On the first question, the Court of Appeals unanimously sustained the Commission.</p>
<p>Tennessee did not petition from that determination and that issue is not before the Court.</p>
<p>It is now being definitively determined that 6 1/8% is the just and reasonable rate of return.</p>
<p>On the second issue, namely whether the Commission could require an immediate reduction by virtue of its determination of this portion of the case.</p>
<p>The Court ruled against the Government with Chief Judge Tatel dissenting.</p>
<p>In connection with the Court of Appeals' ruling, perhaps I should also note that Tennessee sought a stay before the case was heard in that court and that stay was denied.</p>
<p>Moreover, after the case was decided, the Court of Appeals stayed its mandate.</p>
<p>The consequence is that the Commission's order has been continuously in effect and is now in effect.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Have they bothered to pay the said amount?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Tennessee refunded the amount which had been collected in excess of the interim rates prior to the date of the interim rate order, some $7 million, it has done so.</p>
<p>And since the date of the interim order, Tennessee has been charging the interim rates which means that it is -- it has been collecting since that date approximately $11 million a year less than it would have collected under the disallowed rates.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Did you say $11 million?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: $11 million a year less, yes Your Honor.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Tennessee claims that it should be permitted to go back and to charge the disallowed rates and if the Commission's order should be set aside.</p>
<p>It claims further that the way in which the Commission has proceeded exposes it to certain risks and I'm going to attempt to develop that point shortly.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: That's right.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Tennessee claims that there is an important relationship between the amount it is allowed to collect and the ultimate disposition that the allocation issue and that the effect of reducing its collections at this point, may prejudice it later when the allocation issue is decided.</p>
<p>Now, that's -- I have to go through some stages to develop that point.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: That is so.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, Tennessee is of the view that if the Commission's order should be set aside that it could go back and collect what it has refunded.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: From the consumer?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: From the consumer companies, yes.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Mr. Spritzer, may I ask, presently, the old rate before the increase is something in between?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: The present rate is something in between.</p>
<p>It is represented by the rates filed by Tennessee when it made its third successive increase less that portion which was cut out when the Commission said, you were wrong in computing your -- the amounts to which you were entitled on the basis of this seven rather than of 6 1/8% of rate of return.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Well, so that am I understanding hypothetically if the first place (Voice Overlap) --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Was what sir?</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: If the basic rate was 10 cents --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: -- and it went to 12 cents and still undetermined firstly in this proceeding, then the 14 and still undetermined second rate increase then went to 16 on the third --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Right.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: -- what's the reduction from the 16 to the present rate, between 14 (Voice Overlap) --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Since the last?</p>
<p>Yes.</p>
<p>It's between 14 and 16, and since about half of the last increase was predicated upon a claim to a higher rate of return, putting it in terms of your example, the reduction would have been to 15 cents.</p>
<p>All of the other issues in the case having been reserved in the party's rights to possible additional reductions being held in advance pending determination of those issues.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Mr. Spritzer, just so I'm clear about it, is it within the Commission's discretion would allow the increase rate is going to effect to condition it upon a requirement that a refund takes place?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes sir.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: They can either amount to go into effect one way or --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: No, the statute requires when the Commission has suspended the rate that the company undertake to make refund at any amount unless they found excesses.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: You mean, pending within the suspension runs out and the rates want to go into effect, the Commission may or it must require them to undertake --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: If the statute contemplates an undertaking, and that was required here and there is a bond, definitely will make refund of any amount ultimately found to be constitutional.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: How would they refute those amounts, you say they -- if you hear to them the practical issue then they want to refute these refunds, is that correct?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, if the Commission's order were set aside then the now, disallowed rates would be reinstated.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Can they go against the distributing company?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes, the distributing companies are the persons from whom they collect under their tax.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: From distributing companies against the consumer?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: They pass it on to the consumer, yes.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: But they are never paying consumers though.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: No, you might not.</p>
<p>But the consumer company under Tennessee's theory would be obligated assuming that the disallowed rates were illegally set aside, those disallowed rates would be reinstated and those would be the lawful rates with the past period, and Tennessee presumably, would seek to go back and to collect the difference which it lost in the interim.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Was this possible Mr. Spritzer that the increases in the first or second or both might be disallowed, in those event --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Both --</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: -- that would be the refund obligation on the part of Tennessee and not anything coming back to them with the (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Oh, yes.</p>
<p>It's quite possible that substantial portions of the three increases which are not yet been passed upon in their totality and can't be disallowed.</p>
<p>Now, on the --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Mr. Spritzer, excuse me.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes sir.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: You lost me somewhere in your development of facts, the Court of Appeals for the Fifth Circuit with Chief Judge Tatel dissenting, held that whether that the 6 1/8% rate of return was correct.</p>
<p>But that the Commission didn't have the power to put that portion of its determination into effect immediately as it did.</p>
<p>And now, have you told us that despite that decision of the Court of Appeals that is what happened?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: That is right because the Court of Appeals states its mandate.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: For that reason, I see.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Now, our -- the Commission's legal position on the merits of this interim order procedure I think may be very briefly stated.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: Mr. Spritzer before that, may I ask you --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Certainly.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible) is that correct?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes, the Commission has decided that the allocation principles that has not yet translated them into newly prescribed rates.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: Now, with that I would assume that that came (Inaudible) solved in Commission's decision.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Oh, yes.</p>
<p>The Commission's holding oral argument next month on the remaining aspects of the case at which point presumably it will apply the allocation principles which it has declared correct to the rates and make specific rates for the future.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: And the remaining --</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Until --</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, it's -- since we don't know how many months it will be before this case is finally disposed of at the administrative level, it's certainly clear that the case is not moot.</p>
<p>I agree with the suggestion that may be implicit in Your Honor's question that as time passes, the issue become less and less important for the particular case.</p>
<p>But were -- in terms of the Commission's general power to use this method, this is a very important case because a plowed has been passed upon its availability by the decision below.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Do you mean general (Inaudible) interim order?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, the Court of Appeals' opinion at least in some its aspects --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: -- suggest that --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: -- suggest that when -- the Commission might not be able to use this method at all.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: But your opponent really don't contest that general right, they simply say that under the circumstances of this case.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: They are defending the Court of Appeals' decision primarily on the basis of what might be described as the narrower of the two holdings in the case, that's quite right.</p>
<p>They are arguing primarily that there was an abuse of discretion in using the procedure in this case, though some of their arguments and some of the Court's argument appeared to us to have a broader thrust than that.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Again, what are the remaining issues in the litigation?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: The remaining issues relate to other costs of service, which Tennessee has claimed, taxes and depreciation among others.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: And allocation issue.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, the allocation issue has now -- the Commission has come out with an opinion.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: That's in the Third Circuit?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes, that's being reviewed in the Third Circuit.</p>
<p>The Commission has come out with its opinion on the allocation issue.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Voice Overlap)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Pardon me?</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Actually, the review that has been sought there by one of the customer companies rather than by Tennessee.</p>
<p>Now, as to the power of the Commission to use this method, our basic position is that Tennessee has the burden of justifying each of the component claims which makes up the total that it seeks to refute by its rates.</p>
<p>As to the claim that it's entitled to a 7% rate of return, it failed to do so after it had a full hearing.</p>
<p>And we say, having had its hearing on that issue, there is no reason why it should continue to collect any more than it would've collected, had it file its rates on the basis of a proper rate of return factor in the first instance.</p>
<p>We believe that the Commission under Sections 4 and 5 of its Act has plenary rate powers.</p>
<p>And if for purposes of proscribing rates, the Commission can therefore assume arguendo the correctness of the other claims which are made by the company.</p>
<p>We also point out that Section 16 of the Act, which is the necessary and proper article of this statute, authorizes the entry of any order necessary or appropriate to carry out the purposes of the statute.</p>
<p>This Court has often said that a fundamental purpose of the effect is to afford prompt protection to consumers.</p>
<p>And since the mechanism of possible refunds that a later date is both delayed and imperfect and that's the point which the council for the city of Pittsburgh is going to develop at greater length later.</p>
<p>We think the Commission was well within its authority in terminating Tennessee's effort to continue collections on the basis of a claim which had already been found unjustified.</p>
<p>We find support in a number of cases for the use of this interim order type procedure.</p>
<p>One case in this Court, the Natural Gas Pipeline Company case, in the 315 U.S., held that a company which had predicated its entire direct -- which had presented excuse me, its entire direct testimony in support of its rates, could not complain that it had not yet been able to cross examine Commission witnesses on aspects of the case, which for purposes of the interim order, the Commission had decided on the basis of the company's presentation.</p>
<p>Several other Courts of Appeals have similarly allowed use of an interim order procedure to decide a portion of a rate case.</p>
<p>The Third Circuit's Panhandle decision is close to this one and that it also involve rates predicated upon a claim to an increase rate of return.</p>
<p>In that case, Judge Hastie spoke for the Third Circuit and I'd like to refer for a moment to one or two sentences of his opinion.</p>
<p>True, he said in recognition of the time involved in these often long drawn out rate proceedings, the Commission quite properly permits the basic showing of the justification, which existed at the time of filing to be supplemented by evidence of occurrences since filing.</p>
<p>But this is far from saying that a party who tries and fails to make a prima facie showing to support severable elements of his claim is entitled to a postponement of adjudication thereon in anticipation of possible new justification which some future event may supply before the overall case can be completed.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: No, we don't know what the practical effect of the allocation will be until the Commission has finally passed upon the remaining aspects of the case.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: You mean the service.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: I'm sorry, I didn't not understand Your Honor's question.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: The cost of service issue?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: That's right, until the Commission decides the remaining issues, we don't know what the consequences may be to Tennessee.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: Only the cost (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: No.</p>
<p>We know that the principles of allocation in which the Commission has decided may have some impact on Tennessee but we cannot possibly put aside the cost of service issues or determine what the impact will be until those remaining issues are decided.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes.</p>
<p>They may have collected sufficient amounts entirely apart from the impact of this interim order so that they earn the position to earn the full 6 1/8% during the interim period.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: They have to -- if they are going to earn their 6 1/8% rate of return, they're going to have to earn it from the customers who were involved in this case, yes.</p>
<p>Now, perhaps I should turn without further delay to Tennessee's contention that the availability of the interim order procedure that it is not available in cases where there is an allocation issue remaining to be decided.</p>
<p>Now, essentially what Tennessee is saying, is that the Commission's determination that Tennessee's cost of service is less than Tennessee estimated it to be, will only lead to proportional reductions to all customers of Tennessee, will only lead to that if one assumes that the rate relationships, the rates in various zones are going to remain intact.</p>
<p>Tennessee says further, that if it should turn out that the rate structure was all wrong in the Commission's view, that the rate structure was invalid or discriminatory, then it might be, it might be that though Tennessee in all was entitled to collect only something less than what it sought.</p>
<p>That nonetheless, its rates to particular customers might not be too high.</p>
<p>Perhaps I can make this clearer by attempting an illustration.</p>
<p>Let's suppose that the Tennessee has three zones rather than six for simplicity's sake.</p>
<p>And that the basic rate was 60 cents in MCF in Zone 1, 80 cents in Zone 2 and a dollar in Zone 3, that these are the rates for which Tennessee filed in order to produce let us a hundred million dollar of gross revenues a year.</p>
<p>Let's suppose further that as in this case, the Commission examined one element of the cost of service in advance of the others and said, you're wrong, you're not entitled to a $100 million a year, you're seeking that on a basis of an inflated claim as to what rate of return your stockholder should have.</p>
<p>We find that you're only entitled to $90 million a year.</p>
<p>Let us suppose further that at that point, the Commission said, since your total cost of service we found was exaggerated by 10%, we will order a 10% reduction across the board from 60, 80 and a dollar to 54, 72 and 90 cents.</p>
<p>I'm also assuming in this illustration for the sake of simplicity that they're selling equal volumes in each zones, so you effectuate the reduction by a flat across the board cut in the rates.</p>
<p>Now, says Tennessee if there's an allocation issue in the case, it might turn out that some of the premises upon which we fixed rates, 60, 80 and a dollar were all wrong.</p>
<p>It might turn out though we're entitled only to $90 million overall that instead of cutting the rates equally 10% in each zone, the Commission will ultimately say that they ought to be cut 15% in Zones 2 and 3 but they should've remain the same on Zone 1.</p>
<p>In other words, it should've remained at 60 cents in Zone 1.</p>
<p>Now says, Tennessee further, if the consequence of the Commission's order in its impact on Zone 1 is to reduce the rates for that interim period from 60 cents to 54 cents and it should ultimately be determined that the final stage of the proceeding that we're entitled to 60 cents in that zone, we will have no way of going back in collecting that 6 cents difference.</p>
<p>Our answer to that is that it is the burden of the company which proposes all of the rates, the rates in each zone.</p>
<p>It's the burden of the company to have a nondiscriminatory rate structure.</p>
<p>And if that risk cannot be shifted to the consumer, the company is chargeable and the words of Section 4 (b) of the statute, if it grants any undue preference to any person or maintains any unreasonable difference as between localities or as between classes of service.</p>
<p>We point out further that the risk of which Tennessee complains is precisely the same risk as it would've had if it had filed on the basis of a proper rate of return, 6 1/8% in the first instance.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: Wouldn't the statute want to say that during the first instance (Inaudible) that they have a burden of proof to the jury?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: They also have the duty under the statute to file just and reasonable rates and rates which do not discriminate as between any localities or among any classes of service, Your Honor.</p>
<p>And our --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: I'm sorry, I didn't --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: They did not, that's correct, Your Honor.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Why can't they save that allocation now as it been in the first instance (Inaudible)</p>
<p>Suppose they did (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, the principles are determined but the alloca -- those principles have not yet been applied to Tennessee's rates because of the failure to determine all of the other cost of service factors.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Though it can't (Inaudible) be lower or higher at any given zone.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: There's an indication whether -- yes, as to what the adjustments may have to be.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: The indication of what the adjustment have to be (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes, there is a --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: How couldn't they have filed that and except one and two whether they were granted or whether they were denied and that would be determined by looking at the figures.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, there are still indeterminate elements which would have to go into that equation.</p>
<p>In other words, it's theoretically possible that Tennessee would lose something that it would collect for the interim period something less than the permissible rate in one of the zones.</p>
<p>But whether that would occur in fact, depends upon whether any of the other claims of Tennessee are inflated.</p>
<p>In the illustration I gave before, where I thought of this possibility of collecting 54 cents and then finding the 60 cents should've been collected all along.</p>
<p>But whether the company has collected enough so that it had a cushion against this possibility, depends upon whether the company's claims on the other issues not yet decided are found to be wanting in some respects.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: But if the cost of service issues are decided and that it appears on this record then it would be after the allocation where the rate issue have been decided and you found that there ought to be an issue of refund would that go then unfortunately in accordance to the allocation decision?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: If the Commission follows the examiner's decision, which has now been rendered on the other issues, Tennessee would come out whole.</p>
<p>Because the examiner has found that Tennessee had inflated claims on other portions of its cost of service, the consequence of that is that the adjustments which are being made in the rate structure.</p>
<p>The change of the rate differentials will still not result in Tennessee's failing to collect for the interim period, those amounts, which it would be entitled under the Commission's final order to collect.</p>
<p>Now when I said, the Commission's final order, I'm assuming for the moment the Commission agrees with the examiner whether it will or will not, we don't know.</p>
<!-- unk--><p><b> Unknown Speaker</b>: (Inaudible)</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: That is right.</p>
<p>And we have to argue our case and we do, on the assumption that Tennessee might not collect 6 1/8% for this interim period and we do that on the basis that the risk of having defensible rate relationships is on the company, that the consumers cannot be required to pay on the basis of inflated claims to furnish a cushion or a safeguard as against the dangerous that some of the company's rate relationships for which it is responsible may be found discriminatory.</p>
<p>We say that if the Court would've do that, they would be doing nothing less than putting a premium on the presentation of inflated claims.</p>
<p>And in the face of statute, we say, which make that the inescapable duty of the utility to file just, reasonable and nondiscriminatory charges.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: How long -- could I ask you one question?</p>
<p>How long would it probably be before the Commission translates these allocation principles into figures?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: The Commission is hearing oral argument on the remaining aspects of the case before Your Honors in November and I would assume that the remaining aspects of this rate proceeding and probably the other two rate proceedings which had now been consolidated would be decided within the next six months.</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: Am I right in thinking that what the Government is really concerned about here is the principle that's involved in this case rather than this particular situation itself?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, that is our main concern because this is a tool --</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: If you read the Court of Appeals' opinion narrowly so is not to exclude, not to exclude intermediate orders generally or in a zone allocation question and the cost allocation situation like this, limited to this particular case would be very much concern then?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Yes.</p>
<p>Because if the thrust of the opinion is that you cannot use this interim procedure where there is an issue of cost allocation pending, then the procedure has very little utility.</p>
<p>Because as matters now stand, there is scarcely a pipeline rate case before the Commission in which there is not a bitter dispute as to the allocation of charges as between different classes of customers.</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: Yes.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: So, you think it would have -- if it means that we can't use in any case where there's an allocation issue pending would have a broad thrust.</p>
<p>Now, if you treated more narrowly than that, and this isn't the point I was able to get to in the brief, there is also suggestion that it was an abuse of discretion in this case to the use the procedure, because the Commission had already taken evidence on the allocation issue.</p>
<p>Now that's a narrower holding, and our answer of course to the Court of Appeals' view as to that, is that the Commission properly found that though the evidence had been taken as to cost allocation that it couldn't decide that issue as promptly as this.</p>
<p>The Commission found that there was a record there of many thousands of pages.</p>
<p>There were 90 interveners interested in the cost allocation questions.</p>
<p>The Commission said, we don't think we can decide that issue without the benefit of an examiner's decision.</p>
<p>It took the examiner a year to write its opinion in that case, it's a 130-page opinion, it took the Commission two oral arguments thereafter to decide that issue.</p>
<p>And so, it wasn't until 18 months after this interim order went into effect that the allocation principles were actually decided.</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: Supposing the -- can I ask one more question?</p>
<p>Supposing the allocation proceedings at the time of the issuance of this interim order had been in the same posture as they are now, would you issue the interim order?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: No, I think certainly --</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: Now, suppose --</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: -- desirable when you have several issues, whatever they may be, at the same stage to decide them concurrently.</p>
<p>The Commission isn't anxious to fragmentize these cases but they are so huge and some of the issues are so long in the deciding that if you can cut out certain pieces you can perform a service immediately.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Now, the real problem is that whether we can deal with this thing realistically in terms of the present posture of things at the time the case is ordered as to whether we have to look back as it was at the time, that's really what it comes down to.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: (Voice Overlap) business within six months from any view of the bearing of that fact on this litigation?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, yes.</p>
<p>I think the -- there would still be the question or might be the question, what were the lawful rates for the interim period.</p>
<p>So that could have an impact upon Tennessee as to what they collects and retains for that interim period.</p>
<p>If the Commission's reduction wasn't lawful when it was made and if the final disposition of the case should be such that Tennessee did not collect from certain customers in certain zones, all that it was entitled -- would be entitled to under the final order.</p>
<p>Then the question whether the interim order was valid has a direct economic consequence.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: So that there would be no question of mootness because the Commission had decided that people are used to.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: I think the question isn't liable.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Spritzer, may I ask one question?</p>
<p>Do you happen to know approximately how many of these proceedings have been initiated before the Commission since the Philips case and how many of them have been finally determined so that their order of the Commission is now effective?</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Well, I must -- I think to give a meaningful answer to that Your Honor, make a division between the pipeline rate cases and the producer rate case.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Yes.</p>
<!-- Ralph_S_Spritzer--><p><b>Mr. Ralph S. Spritzer</b>: Now, the Commission has made considerable progress in its pipeline rate cases.</p>
<p>It has secured settlements of many of those cases in the last year or two.</p>
<p>It has disposed of more than in the last year or two when it had for a considerable period previously.</p>
<p>And I think the state of its backlog in pipeline rate cases is far better today than it has been in many, many years.</p>
<p>The producer cases present a quite different problem because the Commission in that field has decided that it is going to adopt a quite new regulatory approach and it has initiated two major proceedings so-called area rate cases.</p>
<p>The aim is to decide what our reasonable or permissible rates for producers on the basis of what might be described is a kind of OPA feeling price for an area to take a whole geographic basin of the country, certain parts of Texas, when they decide what a fair price is for gas from that area.</p>
<p>It is pursuing that approach in the case of producers in lieu of the traditional case-by-case company-by-company approach, which has seemed to the Commission to present such unmanageable difficulties in relation to producers.</p>
<p>But in terms of pipelines, the Commission is now unhappy to say much more current than it has been a long time.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Spritzer, we take so much of your time, we took five minutes, I think extra, we'll give you five minutes more on your rebuttal and you may have for your side five minutes also gentlemen.</p>
<p>Argument of Charles S. Rhyne</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: Mr. Chief Justice --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Rhyne.</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: -- may it please the Court.</p>
<p>The City of Pittsburgh is appearing here as a gas consumer as a representative of its 600,000 for instance most consumer -- gas consumers, to speak in support of the use of the interim order procedure in this case.</p>
<p>Because we feel that it is vital to the interest of consumers, it's vital to prevent a frustration of the major purpose, the Natural Gas Act which this Court has said time and time again, is to prevent natural gas companies from exploiting consumers.</p>
<p>In the light of one or two of the questions, which have a little broader thrust within this case, may I say to you Mr. Chief Justice that in August 1962 according to the brief filed on behalf of the Commonwealth Pennsylvania, there were $900 million that had been paid subject to refund in this pipeline cases.</p>
<p>According to the petition for writ of certiorari filed here for the Solicitor General, the amount of this money is piling up at the -- at $375 million a year.</p>
<p>Also --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: All pipelines?</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: All pipelines.</p>
<p>And on -- this is on page 19 of the petition for writ of certiorari and right there, they referred to what happened in 1961.</p>
<p>They pointed out that they settled 31 and I used the word “decided” or settled, or concluded 31 pipeline cases.</p>
<p>And that in doing so, they reduced the amount requested by 37% and that in reducing it back 37%, 56% of this amount of reduction was in the rate of return, the very thing that it is here.</p>
<p>Now, I would call the Court's attention to the fact that according to the Commission's 1961 Report, 30 and I emphasize, 30 of these 31 were settled only one was actually decided.</p>
<p>Now, why is that in Court in here?</p>
<p>Because under the -- in the context of this case, Tennessee asked for $75 million, $11 million was disallowed in the rate of return.</p>
<p>The examiner has allowed an additional -- or disallowed an additional $26 million.</p>
<p>$37 million or 50% has been disallowed.</p>
<p>So, the situation that exist down at the Federal Power Commission, the reason why the Commission has moved into use this interim power at long last is, this is a rather shocking way to evade rate regulation under the Natural Gas Act.</p>
<p>These pipeline companies filed one rate increase -- this is Tennessee did here, one on -- right on top of another and so this backlog, this regulatory log grows larger and larger and there's tremendous pressure to settle -- to settle and when you settle, it's the consumer that loses.</p>
<p>These pipeline companies are very glad to come in and say, well, we'll take 10% or 25% off and of course that always means millions of dollars.</p>
<p>And so then they push those of us who represent consumer.</p>
<p>Well, let's settle.</p>
<p>Let's settle.</p>
<p>There's tremendous pressure on the Commission staff to settle and they always get more.</p>
<p>So this allowance of 37% in 1961 is a great boom for the pipeline companies.</p>
<p>This business is conference procedure, the settlement procedure I know that the Commission is doing a terrific job.</p>
<p>I'm not criticizing at all but I am saying that right here the Commission has put its finger on one of the greatest escape route and that you have no effective regulation of natural gas company today under the Natural Gas Act because of this very thing, this pyramiding of one rate increase right on top of another.</p>
<p>And I think that the Court should take all of those facts into consideration in deciding this case.</p>
<p>Not only do I agree with what Mr. Spritzer had said but I think that this pressurized settlement of cases before the Federal Power Commission is one of the most vital things that this Court must consider in facing up to what the Commission is trying to do about this pated.</p>
<p>And I say, it's closer to 50% than 37% rate increase.</p>
<p>Then the Commission can't stop these pipelines from doing it.</p>
<p>They have an absolute power to file one year after year almost day after day.</p>
<p>So, we urge that this interim power which the Commission has at long last started to use is absolutely vital to prevent the frustration or the major purpose of the Natural Gas Act and to stop this greedy train escape route, this windfall to the pipeline companies.</p>
<p>Now, I was to discuss whether refunds were an adequate remedy for consumers and we say they're not for several reasons.</p>
<p>Number one, under today's mobile society, people move around all the time.</p>
<p>And when one of these rate cases has completed four or five, six, seven years after it started, you'd have a hard time finding the ultimate consumer who paid the illegal rates and get the money back in his pocket because it comes out of the ultimate consumer's pocket not out of the pipeline or other distribution company's pocket.</p>
<p>Secondly, in connection with the rate increase and this is particularly important for small business, as well as large business, when a rate increase goes into effect, they must increase the price of their product immediately in order to recover what they paid out of their pocket right then.</p>
<p>And that puts him in a terrible competitive position with respect to those who use other kinds of fuel.</p>
<p>Now, they can't change over to some other kind of view because the cost of putting in new burning equipment is too great.</p>
<p>So, when they come along to the end of this thing five, six, seven, eight years afterwards and there's a refund, it doesn't pay him for these business losses.</p>
<p>There is an immediate effect on the consumer and they get back the rate increase is plus 7% interest after deduction of a lot of expenses.</p>
<p>So they never get all of their money back.</p>
<p>And now, with respect --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Mr. Rhyne --</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: Yes, Mr. Justice.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: -- what happens to the fact of the matter if you can't find the consumer, what happens to the refund, did the company keep it or --?</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: Mr. Justice Harlan, there's probably more confusion on that and almost in any other question that exists in this whole field, the distribution companies claimed it and it's suppose to be decided under state law as to who gets it.</p>
<p>And in ultimate thrust, I guess if you can't find him -- the money really should escape to the state eventually but I don't think that you follow down that long road.</p>
<p>I might say that one of the complexities which demonstrates the inadequacy of the refund thing are the decisions of this very Court in the Muscatine case and then in the Natural Gas case where you handed down four opinions in trying to decide how you get the money back to consumers.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Have you gathered up or can you gather up the history of what has happened in these refund cases before and since Muscatine, with reference to which part of it went to the companies and how much was lost to the consumer's who paid?</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: I can't enumerate, Mr. Justice Black.</p>
<p>I'd like to ask Federal Power Commissions do it rather than us because we have a very few lawyers in my office and this is a tremendous job.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Well, --</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: And I think that it's an answer that --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Voice Overlap) have done it.</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: I would like to see --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: But I think we've had a several times that so far as I know, it is never going to anybody except the companies when the people were -- disappeared and they didn't pay.</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: Well, the state commissions have stepped in --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Maybe it had.</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: -- and I think that it's an open question as far as I know Mr. Justice Black but I will never get the answer.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: (Inaudible) that any state attempted any mischief in any part of this though?</p>
<!-- Charles_S_Rhyne--><p><b>Mr. Charles S. Rhyne</b>: Not that I know.</p>
<p>Not that I know.</p>
<p>Now, I must hurry along because I have very little time.</p>
<p>I'd like to say to the Court too that the Congress recognized that refunds are not an adequate remedy for the consumer because they provided for suspension of rates of five months suspension.</p>
<p>And I don't know whether they thought that the Commission could decide this case within five months but if they had thought that refunds were adequate, they wouldn't provide a suspension.</p>
<p>They would let the rates go into effect immediately.</p>
<p>So, we say most respectfully that if the Court was wrong below in saying that refunds are an adequate remedy for the consumer in concerning itself only with trying to protect the pipelines.</p>
<p>Now, the second point that I was to discuss relates to Columbia Pipeline's position here.</p>
<p>It's very difficult for me to understand their position because they are pipeline customer, they are stakeholder, they're not a consumer.</p>
<p>They agreed that these -- well in the first place, they passed on each of these three rate increases directly to their consumers.</p>
<p>They agreed in the settlement of ten of their cases last year that any money received from this would go right along to the consumers.</p>
<p>They say in their briefs something about them being representative consumers and I say to you that's about like calling yogi bear if I may say so up to that for the giants.</p>
<p>He wouldn't try very hard and I can't imagine this pipeline company which is one of the tremendous giants of the industry with 42,000 miles of pipeline, it's a billion dollar corporation, more of billion and a half corporation coming in here and speaking for the consumers.</p>
<p>They seem to be trying to say that somebody up in Boston out to pay this illegal 7% rate so that they can get their hands on it on a refund.</p>
<p>They're trying to say that Tennessee can't pay back to them of what money they pay in illegally but it's not their money in the first place.</p>
<p>And in the second place, Tennessee has entered into an obligation, it's on page 508 of the record, to pay ack all of these illegal amounts and Tennessee is a giant too, they have billion and a half dollar corporation.</p>
<p>They are present in this record over on pages 419 and the following talks about how rich and prosperous they are.</p>
<p>They have plenty of money to pay it back.</p>
<p>So, Columbia can't possibly be hurt anyway that you approach this.</p>
<p>Now, they say maybe this, maybe this, maybe Columbia will have some money coming back, maybe Tennessee will have some money coming back.</p>
<p>But with this $26 billion bulge or padding or pad, as Chief Justice Tatel call it, I can't see any question but what Columbia or anybody else who might have any money coming back is going to get that money.</p>
<p>And they assumed that the Commission is guarantying Tennessee of 6 1/8% return, they're not doing that.</p>
<p>They haven't guaranteed anybody that but I say it's rather shocking that they having conceded that the 6 1/8% is just unreasonable to come here to this Court and ask this Court to reinstate the 7% rate pendente lite so to speak.</p>
<p>And just because they say that Tennessee have may have made a mistake in their rate design.</p>
<p>Well, now consumers are not guarantors either and they can't shift the risk of the natural gas business from consumer -- from the stockholders to consumers.</p>
<p>The Act doesn't contemplate that by any stretch of the imagination.</p>
<p>And so they're here, I think throwing up some kind of a smoke screen, some kind of a shadow box to try to confuse the issues with respect to this interim order procedure.</p>
<p>And my time is done, so I would simply say this.</p>
<p>We strenuously urge that the lower court decision be reversed because we feel that what is occurring and what has occurred in this case before the Federal Power Commission, is a shocking abuse of the power of these pipeline companies to file increased rates and that the consumers must have this protection.</p>
<p>There must be some way to break down this escape hatch and stop the gal -- this exploitation of consumers, which is going on under the present circumstances down to the Federal Power Commission.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Littman.</p>
<p>Argument of Horry S. Littman</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: May it please the Court.</p>
<p>I think Mr. Spritzer is to be remanded for his excellent clear statement of the facts of this case.However, before proceeding with my -- with the main body of my argument, I should like to straighten out just three or four items of fact.</p>
<p>Mr. Spritzer said early in his argument or stated the question early in his argument as being whether the Commission as my notes show, whether the Commission can decide a rate case and reduce rates at an interim stage without waiting until the entire case is completed in all of its aspect.</p>
<p>Now, we do not agree that that is the question that is presented here.</p>
<p>The reason we do not agree with that is born out by the record.</p>
<p>We certainly do not and never have taken the position that the Federal Power Commission lacks authority generally to issue interim rate orders.</p>
<p>Indeed, in this very case as the record shows in our memorandum, in opposition to the interim order procedure, at page 592 and that's the bottom -- the number at the bottom of the page.</p>
<p>We advise the Commission that we wanted to make it crystal clear that we did not oppose the interim order in this case.</p>
<p>If the Commission would confine its decision to the -- as it one or two to the issue of rate of return, provided it would at the same time hand down its decision on the hotly contested allocation issue which it had fully heard and which had been fully briefed and which was awaiting decision at that time.</p>
<p>In other words, we told the Commission, we thought the Commission should be equally as diligent in expediting the decision in this case on the very important allocation issue as well as on the rate of return issue.</p>
<p>In fact, we --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Does that mean that your -- your argument is how long would be until you got an allocation procedure.</p>
<p>There's no case where the Government issued a refund.</p>
<p>Would you enter an order?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: That is --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Do you have to go that far?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: That is -- well, what we say is that where there is a contested allocation issue where that issue is in contest --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Yes.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: -- it must be decided for the reasons, which I will go into detail in my argument, before the Commission can reduce rates for the reasons I will state.</p>
<p>Now, the Natural Gas Act, it's impossible to order a reduction in rates until the allocation issue where it's contested is decided.</p>
<p>Now, there are many cases, if Your Honor please, there are many cases where interim orders can be issued.</p>
<p>For instance, the case that counsel cited, the Natural Gas Pipeline Company of America case, which this Court would reach this Court.</p>
<p>In that case, an interim order, which was entered into, was a Section 5 (a) proceeding where the Commission was fixing rates prospectively.</p>
<p>Now, in a situation like that and where the company cannot be heard by a retroactive rate making device which would deprive it of its -- which would deprive the company of the very dollars -- of revenue that the Commission itself finds are needed in that situation of course an interim rate order may be entered and this Court so held.</p>
<p>I might also point out that in the Natural Gas Pipeline Company of America case there was no allocation issue.</p>
<p>An order may also be issued validly where there is no contest on allocation.</p>
<p>Obviously, if the parties are not fighting about the company's method, the company's method it suggests is agreeable to the parties in the case, there was no argument and this has happened many times.</p>
<p>It is not every case where allocation is disputed.</p>
<p>For 18 years we --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Would you mind finding --</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Pardon?</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Would you mind defining from this argument, just how far your argument is?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: What do you mean by allocation?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: I mean by the allocation --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Voice Overlap)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes.</p>
<p>I mean by the allocation issue --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Allocation?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes.</p>
<p>The question of how the total overall cost of service in the aggregate how that should be divided among the customers.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Your argument is based on that limited definition of allocation?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, that is -- that's right.</p>
<p>That's the very broad of course but it's the best I can do at the moment.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Well, Mr. Littman, doesn't the Commission assume for the purposes of its order that your allocation is correct?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, it does.</p>
<p>The interim order based the use the allocation method, which we selected, for purposes of its interim order.</p>
<p>It is our contention for the reasons, which I will soon develop, that that cannot be done where there is a contest as here on that question among the customers.</p>
<p>And where the very -- where the Commission would adopt that method for interim order purposes only and later on could adopt after deciding the issue a different method and thereby deprive the company of many millions of dollars of its rate of return.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: But if the Commission assumes for the sake of its order that your allocation is correct then the only way you could suffer would be if your allocation is wrong, isn't that correct?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: If -- yes, (Voice Overlap) the Commission should --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: You could only suffer if your allocation was wrong?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, that is that the Commission were to later adopt a different method and prescribe rates retroactively.</p>
<p>In other words, tell us at the end -- tell us after deciding the allocation issue that the very rates that it ordered us to reduce shouldn't have been reduced at all or should've been reduced in lesser amounts and then retroactively decides that that is the fact by a different method of allocation then we are --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: That could only happen though if you were wrong.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: If you have made the original allocation wrongly as against some of the regions?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes Your Honor, and let me say that regard while we're on that subject.</p>
<p>I hope to reach later at all but (Voice Overlap) but this will be a good time.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Well, if you want to reach it, don't mind me.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Now, let me point out here, if Your Honor please, that as to our ability to guess what is the right method, let me hasten to point out that our company was born in 1954, I'm sorry 1945.</p>
<p>I have bad way of reversing figures and during the 18 years or more of our existence, the Commission had never decided what would be the proper allocation, cost allocation method for our system.</p>
<p>The Commission had never said any guidelines for us and it had never said any policy as to how costs should be allocated.</p>
<p>It decided cases on a case-by-case method.</p>
<p>And this case, the one immediately preceding it, was the case which the Commission selected as the first case in which to decide that issue.</p>
<p>At the hearing, there were some five different extremely complicated methods of allocation presented and the Commission adopted none of them.</p>
<p>It adopted the sixth.</p>
<p>Now, I say that our chances of making a correct guess as to what method of allocation the Commission would adopt in this case were practically new.</p>
<p>But I shall go into --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Who should bear the burden that if you're wrong, you or the consumers?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: We're not asking the consumers to bear any burden at all.</p>
<p>We pay them back all of the money that is due to them when it comes due at 7% interest under the refund provision.</p>
<p>They can't be hurt, it seems to me, but we can be terribly hurt by being deprived of the very dollars, a good portion of the very dollars which the Commission found in this case.</p>
<p>We need it in order to enable us to operate our property and render good service to the customers.</p>
<p>That -- it is in that way that the customer can really get hurt that the customers and the company.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: Isn't the risk is inevitable in this operation?</p>
<p>Suppose you got the 7% that you asked for and there could be subsequent decision on the allocation that would still cost you money and under your own theory of the case, isn't that correct?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: That is a risk that we would accept, that we do accept.</p>
<p>In other words, what Your Honor is talking about Judge Tatel mentioned it too is the risk where we file rates that are too lawful, that is that we knowingly and voluntarily don't have a enough sense but we make the final.</p>
<p>To file rates under our own methods that are -- is sufficient to recover our cost of service.</p>
<p>When we do that and if the Commission should've at the end of the case prescribe rates that are higher than those which we filed by then of course that is a risk we undertake and we're certainly willing to accept it but that -- and that is not what we're complaining about here.</p>
<p>What we're complaining about here is that the Commission adopted our method of allocation for the temporary purpose of immediately reducing rates and by so doing in view of the facts of this case because the allocation issue was so bitterly contested.</p>
<p>We could very well find ourselves in a position where when the Commission does decide the allocation issue later on just by reasonable shifting of the costs among the various zones.</p>
<p>We then may find ourselves in a position where we had made refunds to customers which the customer -- which the Commission finds when it decides the allocation issue, it decides what's the proper method, refunds that shouldn't have been made or should've been made in lesser amounts than those which we made.</p>
<p>And we have to pay for that out of our own pocket.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Voice Overlap)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes.</p>
<p>Yes, Your Honor.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: So the question of (Inaudible)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, but our risk, if Your Honor please, and I think Your Honor -- your point is an excellent one.</p>
<p>The measure of our risk is the rate that we filed in each zone.</p>
<p>We're using the 7% rate of return.</p>
<p>It is a higher rate and gives us the degree of protection in each of these zones which our -- under our filing there would be no question in our mind no matter which of these allocation methods were used.</p>
<p>We were fully protected but that risk if Your Honor please must be measured by the rate that we filed.</p>
<p>Our burden issue Your Honor rightly pointed out is to sustain that rate.</p>
<p>Our risk is measured by the rate that we filed not by the rate which we would have filed had we used a 6 1/8% return.</p>
<p>I --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Isn't that the statutory responsibility of the company to establish nothing but there and reasonable rates and if it does establish any rates that are greater than fair and reasonable rates that it can -- it shouldn't be in a position to complain if the Government takes for granted in its order every factor that you put into the case except the one that it has established after a hearing?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Well, I agree with the first part of Your Honor's statement.</p>
<p>It's the latter that I cannot agree with for these reasons.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Well, I guess that be your case, wouldn't it?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, if I agree with that, I wouldn't be here, sir.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Isn't that so?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: I wish I could but I just can't.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: (Voice Overlap)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: And for this reason.</p>
<p>I think basically, we must and I think this is where the Commission didn't think this thing through with all due respect.</p>
<p>They ignored the real distinction between an item in a cost of service which is claimed by the companies such as an operating expense.</p>
<p>Incidentally, let me point out that over half of these rate increases involved in these three pending cases involves money increases put upon us by our own producers.</p>
<p>In other words, they're producer increases.</p>
<p>We get nothing out of that, we simply are accounted to pay to those producers.</p>
<p>Now, an item of expense or an item in the cost of service can be accepted by the Commission for purposes of an interim order.</p>
<p>In other words, the Commission can as it did here and we don't complain about this.</p>
<p>They can say, Tennessee we're going to accept you at your word as to every item, every dollar that you were claiming in each of your items in the cost of service such as cost of gas purchase, depreciation, the rate of -- except for rate of return.</p>
<p>We'll try the rate of return issue, we'll reduce that $11 million and thereby reduce your overall cost of service by $11 million.</p>
<p>So far so good, we don't like the reduction.</p>
<p>We took an appeal from that reduction in the rate of return from 7% to 6 1/8%.</p>
<p>We lost that and so we're not arguing or rearguing that here.</p>
<p>We think that is perfectly valid but when the Commission accepts of item in the cost of service for that purpose accepts that no one can be hurt.</p>
<p>We can't claim anymore in dollars than we sought in hearing.</p>
<p>We can't possibly claim anymore.</p>
<p>That item has only one way to go and that is down.</p>
<p>In other words, at that juncture of the procedure putting aside in the allocation issue, the Commission can properly say, “Your total overall cost of service should be reduced by at least $11 million at this point.</p>
<p>Later on, we may want to reduce that more after we hear the other issues.”</p>
<p>We have no complain about that, if there's no allocation issue.</p>
<p>But the issue of allocation is a horse of an entirely different view even if it is the method that we suggest that in these circumstances.</p>
<p>For this reason, when the dollars of total cost of service or total revenues which the Commission finds are the total dollars that we should have and the total dollars that we're entitle to collect in order to render service properly to our customers.</p>
<p>When those dollars are divided and distributed to the six rate zones on our system, the -- that must be done in a proper manner otherwise if the Commission uses one method even though it'd be ours, for interim order purposes, and later on, switches around after hearing and uses a different method.</p>
<p>Then as this case show, we could be harmed millions of dollars and be deprived thereby of millions of dollars of our cost of service.</p>
<p>Let me illustrate it, if I may, Your Honors would open please to page 594 of the record and I'm again referring to the bottom page, you'll see a tabulation.</p>
<p>I'm not going to unduly complicate this.</p>
<p>Now, this is a tabulation which appears in the motion that we -- or the memorandum that we filed with the Commission objecting to interim more procedure.</p>
<p>We were here explaining why we were objecting.</p>
<p>Your Honors will note that there are five columns, these -- and you'll notice the six zones which are represented by the six lines Southern, Central, Eastern, New England and so forth.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: What page are you referring?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: At page 594 of Volume 2 of the record.</p>
<p>Now, each of these columns represents the costs as allocated that each of these six zones under each of -- under the five methods that were submitted and the first column the one that was submitted by Columbia.</p>
<p>Second, one by consolidated system, the third by our New England customers, fourth by the Commission's staff and fifth by Tennessee and you'll notice that in the bottom in the bottom line that the cost of service used in each case was approximately the same.</p>
<p>There could be some slight difference but that's immaterial.</p>
<p>Using the same cost of service, which in the case is the staff's cost of service in the previous docket number G-11980, that's the docket where the allocation issue was tried actually.</p>
<p>3And the Commission said, they would use whatever method they decided, they're here.</p>
<p>So, I'm going to these figures that come out of that docket for illustrative purposes.</p>
<p>Now, here's what I'd like to point out that while the Commission would find if it had adopted for instance the staff's cost of service in this case of the total dollars at the bottom of each of these columns.</p>
<p>If the Columbia method were -- of allocation were used some $23,852,000 of the total cost would be allocated to New England under Columbia's method.</p>
<p>But under our method, Tennessee's method, some $18,614,000 would be allocated to New England.</p>
<p>In other words, there would be a difference by just by reason of the shifting of cost between zones under these different methods there could be as much as a $7 million a year difference in the allocation in one zone using the same cost -- the same overall cost of service.</p>
<p>Now, --</p>
<!-- unk--><p><b> Unknown Speaker</b>: (Inaudible)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Well, as much as the -- I'm sorry, I should've said the New England method.</p>
<p>The New England method it was my fault I misled you.</p>
<p>The New England method would've given -- would've assessed $16 million, $16.8 million to the New England zone and Columbia $23.5 million, $7 million difference and of course they're very different --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: It didn't actually happened in this case, however --</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: No, I'm going to -- well, I'm just coming to that next.</p>
<p>If Your Honors will please turn to Appendix A of the white record which is our brief.</p>
<p>You will now find -- well, I can only say -- I can now come closer to what may happen or did happen in the instant case.</p>
<p>Here, in the first column, we show for each of those zones the revenues prescribed, the revenues, which we would receive under the interim rates.</p>
<p>Sorry?</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Where are those?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: On page 38, Appendix A of our white brief that is some of our brief, the Tennessee's brief, respondent's brief.</p>
<p>The last page in that white brief.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: (Inaudible)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes sir.</p>
<p>In the first column, it will be noted that under the interim order, which the Commission prescribed in this proceeding, you'll find the various revenues which we would receive from each of the zones and I direct your attention particularly to New England.</p>
<p>Here, we would receive or we are now receiving as a matter of fact because we're now operating under the rates which the Commission compelled us to produce $32.9 million.</p>
<p>Now, that as Mr. Chief Justice has pointed out was the result of reducing a rate of return by from 7% to 6 1/8% that is total cost service by $11 million and using the suggested method of allocation, which we suggested.</p>
<p>Now, look at column 2, if Your Honors please, if the Commission had done what we implored them to do, namely to decide that the allocation issue which I think they could have decided that in there.</p>
<p>Then here's where they would've come out using the identical overall cost of service reflecting the $11 million reduction overall because if you add at the total figures in both of these columns you'd come out exactly the same.</p>
<p>Now, using the total same cost of service, you come out -- you would -- the Commission would have found that the proper portion of the total cost of service allocable to New England was $34.3 million.</p>
<p>Now, having made reductions under the compulsion of the Commission's order based on a $32.9 million cost of service, we could never recoup assuming that this is what would happened at the end of the case.</p>
<p>We don't know what will happen at the end of the case.</p>
<p>We could never recoup the deficiency of $1.4 million shown in column 3.</p>
<p>We could never get that back because we could not file increased rates retroactively.</p>
<p>We're stuck with a million and a half dollars, which is a part of the very colors of return, which the Commission found just and reasonable and which we were entitled to receive simply because the Commission refused to decide this controverted allocation issue and adopted our method for the temporary purpose as a temporary expedient of getting rate reductions to the consumers.</p>
<p>In fact, a windfall of a -- in this case of a million and a half.</p>
<p>Now, I want to point out very, very clearly.</p>
<p>It tend to refer me of course to point out.</p>
<p>I'm not saying this is what's going to happen at the end of this case.</p>
<p>I don't know what's going to happen frankly.</p>
<p>It may come out much worse than this if for instance Columbia's appeal in the Court of Appeals is sustained.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: What is that appeal that you left?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: There, the Commission decided the allocation issue finally last February and the Columbia people have taken an appeal to the Court of Appeals.</p>
<p>And that matter is now being briefed.</p>
<p>Now, if that --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: It's the Court of Appeals for the Third Circuit?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: No, for the District of Columbia, I have this number.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: What's this I the Court of Appeals for the Third Circuit on June --</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: That -- there is no -- the Third Circuit, that was an error.</p>
<p>It's Court of Appeals for the District of Columbia, that's where that appeal was pending.</p>
<p>Now, if the --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Do you have the Government's chronological statement?</p>
<p>I don't know if you have it.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, I have Your Honor.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: This, -- on June 4th of this year that petition for review was filed in the District of Columbia Court of Appeals?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, that should be --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: So, the only thing wrong is C.A. 3 here?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: That's the only --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Is that right?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: -- yes.</p>
<p>I'm sorry, I should've found that error myself but I didn't.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: But it's the -- and that's Columbia's petition to review the allocation decision of the Commission?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes.</p>
<p>Yes, Your Honor and when we say Columbia, we use that as a short term -- shorthand term for Manufacturers of Light and Heat.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Mr. Littman, is that -- this allocation cost is column 2 that's now before the Court of Appeals in the District of Columbia, is that it?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: The method that was used, the method that the decision of the Federal Power Commission that -- that the method that they adopted --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Well, what I'm trying to get at, is this what the Commission came up with?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: No.</p>
<p>No, if Your Honor please.</p>
<p>The Commission simply decided what method is the proper method, they didn't.</p>
<p>They did translate that into dollars --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: But you did -- you did is that you protected that method into dollar and this what come up?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes.</p>
<p>We say, in other words, what column 2 represents in our brief is, we have taken the method, which the Commission found last February after deciding the allocation issue was the proper method.</p>
<p>We then applied it to the total overall dollars of cost of service, which the Commission used for purposes of order.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: But it's the method, which is now being reviewed at Columbia in instance in the Court of Appeals (Voice Overlap) --</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, Your Honor.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: But you didn't appeal?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: We did not appeal that matter.</p>
<p>That is --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: You really did not appeal under that.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: That is correct.</p>
<p>That method it was not appeal by us, it was fairly close to ours except in the New England zone.</p>
<p>And I'd like to say that further in this regard that the reason basically under the law why we contend that an order of this kind is invalid.</p>
<p>Well, let me first finish up the previous idea.</p>
<p>If Columbia -- if Columbia is successful on that appeal, we can be hurt a great deal more than they shown in this table.</p>
<p>This table of course reflects that the proposition or the hypothesis that we're going to win all the issues other than the rate of return issue which we have already lost.</p>
<p>The table in the Government's brief which appears at the last page of their brief shows what would happen if the Government of if I should say if the Federal Power Commission staff were to be if the Commission's examiner would to be sustain in all of the items of cost of service concerning which we're taking field.</p>
<p>So as just Judge Tatel below said, this thing was just too much for him to try to predict what the outcome will be and he said he wasn't going to speculate and I just can't speculate either.</p>
<p>I do know, however, that we have been by this order, by this method we have been subjected to the hazard of losing many dollars of our return.</p>
<p>The very rate of return that the Commission has said, we were entitled to.</p>
<p>Now, the reason, basically, I should've gone to this long time ago but the reason basically why this procedure is invalid it is because as this Court held in the Mobile case the -- under the Natural Gas Act, the Commission reviews rates that are filed under Section 4.</p>
<p>And it can -- but it can't set them aside only upon making a finding that those rates are unlawful.</p>
<p>Now, what we're saying here is that, and what Judge Wisdom said in the majority opinion below, was without first deciding the contested allocation issue, without first deciding what is the proper method to be used to distribute the overall cost to the various zones.</p>
<p>The Commission had no basis for deciding or determining which of the filed rates in the specific zones are unlawful the extent to which individual rate should be reduced or to whom refunds are due.</p>
<p>Now, we submit, that that is absolutely correct in accurate statement of the situation.</p>
<p>To be sure, the Commission found --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Was there -- was there a determination here in putting in the interim rate that -- that your rates were unlawful?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: They said that but we say they couldn't have known that.</p>
<p>They had no way of knowing until they decided the allocation issue whether they were or were not in fact unlawful.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: You just say that some interim procedures are quite probable.</p>
<p>If there had been no allocation as here, you would've accepted the -- you would have no argument about the interim rate?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, and as I said earlier I -- we advised the Commission in this very case.</p>
<p>We said, it's perfectly alright for you to go ahead and enter an interim order by deciding the rate of return issue.</p>
<p>But for heaven's sakes, protect us here by also deciding the allocation issue at the same time.</p>
<p>We did not oppose the interim order procedure.</p>
<p>We said this in this case if they had decided the allocation issue.</p>
<p>We said, look, you already heard this issue.</p>
<p>It's been fully heard, it's been fully briefed, you have it before you, you can now decide it.</p>
<p>And the only reason that took them 18 months as Mr. Spritzer said it did to decide the allocation issue, was because they didn't do what we asked them to do.</p>
<p>Namely, omit the intermediate decision procedure as they did in the case of the rate of return issue and decide the allocation issues as well as the rate of return issue.</p>
<p>If they had done that, there might have been a very short delay a few months but they couldn't have been much delay because after this case was finally argued to the Commission after the examiner took a year to hand down as a report.</p>
<p>And let me say, he was a very able thorough examiner but he told us that the hearing -- the reason he was going to take a long time to write his report was because he had so much other work to do, he couldn't get to this case for many months.</p>
<p>The delay was the Commission's fault in not omitting the intermediate decision procedure.</p>
<p>We say, they should've been just as diligent in that regard so as to protect us as well as the -- in their diligence to protect the consumer.</p>
<p>We think both should've been protected here.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Mr. Littman, --</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, Your Honor.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: -- does the record show what's the total increase in rates allowed and how much bigger revenue you get by reasonable interim rate than you were getting from the rate that the previous increase?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Well, let me -- I think I can answer your question this way, in this particular docket, 19983, our total filing and was $26,590,000, that's overall.</p>
<p>The Commission reduced those overall revenues by $11 million.</p>
<p>Does that answer your question?</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Into what?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: The Commission here -- the Commission's interim order here reduced those overall revenues by $11 million meaning that were collected.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: What I want to find out was, were the interim rates larger or smaller than the rates you had before you asked these three increases?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Well, the interim rates are smaller.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: They're smaller?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, there was $11 million reduction overall.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: And what you asked but --</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Oh no,no, no.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: -- I'm talking about what you asked -- I'm talking about what the company was previously collecting.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: I'm sorry.</p>
<p>You mean overall?</p>
<p>No, it was -- the interim rates were less than that which we were asking overall.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: I understand they were less.</p>
<p>Then you're asking -- maybe I haven't made it clear.</p>
<p>You were collecting something before you asked these increased rates.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: You were getting a certain amount of revenue, the revenues you have given here and the revenues of interim rate.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Yes, Your Honor.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: What were your revenues, total revenues before you got -- before you file this application for increase?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Well, I can't give you a dollar figure.</p>
<p>I can only say there were $26 million less than the new filing that have been they were after the new filing in the last docket.</p>
<p>I can't give you the total dollars.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: You asked the $26 million increase, is that right?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: I think, perhaps, I can give that to you.</p>
<p>I think I have made a note here that will help.</p>
<p>The revenues overall at the interim rates were approximately $266 million.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: That's shown on the appendix of your brief?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Well, if you add the picket, yes.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Voice Overlap) now, what I want to know is, what it was before you asked for those increases and got the interim rate.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: It was $26 million less than that.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: $26 million less than the $266 million?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Approximately, yes.</p>
<p>Yes.</p>
<p>About 42 -- $240 million approximately overall.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: The -- where the allocation issue is contested, they could not deprive the rate until they had decided that issue because of the fact that it without so doing there had no way of knowing whether those rates were -- as filed in dollars were or were not just and reasonable.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: No.</p>
<p>If you're talking about an interim order, I'll say no, they couldn't.</p>
<p>If you're talking about a final order, I say yes, they can.</p>
<p>Now, --</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: An interim order, no.</p>
<p>They can't use one method in an interim order and another method in another order for this reason.</p>
<p>If they do that then that leads to the proposition that it is inexorable.</p>
<p>The Commission will find for purposes of -- will find what it issues its interim order that the rates that we filed in a particular zone are not just and reasonable.</p>
<p>And when it uses a different method, they later find that the rate would be filed in that particular zone are in fact just and reasonable.</p>
<p>Now, there can't be two inconsistent findings that a rate is just and reasonable and not just and reasonable, during the same period of time, any more than two objects can occupy the same space at the same time.</p>
<p>So, being unable even if they had thought our method but I realize that there -- there is a catchy --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: What you're saying in effect is that whole -- this -- what you're referring to here is acceptance is really not an acceptance of your proposition, it's also a conditional acceptance of your proposition.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: That's right.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: That's what it comes down to.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: That is correct.</p>
<p>We note -- I want to also make it clear, we think our method was right.</p>
<p>We suggested it to the Commission.</p>
<p>We would've been perfectly happy to have the Commission adopt it but not for just one purpose and not for another but for all purposes.</p>
<p>If the Commission adopts our method at the end of the case, that is perfectly alright, we have no complain.</p>
<p>And let me also point out if Your Honors please with regard to allocation.</p>
<p>A company is primarily interested of course in recovering its total cost of service.</p>
<p>That's what it is interested in, the rules require that company to submit a method of allocation as a part of its filing.</p>
<p>I like to call that a suggested method because the company can't gain and make a lot of suggesting one method or another method.</p>
<p>It doesn't stand to gain a thing because when it submits that method, the rates that are produced by that method, the rates that are produced by applying that method as a total overall cost of service must equal precisely the total overall revenues which those rates will yield at the test year.</p>
<p>So we do this, the Commission requires us to do it, we're perfectly happy to do it.</p>
<p>But we don't believe that the risk that is imposed upon us by submitting a suggested method, wherein a case such is this where the Commission has never decided the allocation, one method of allocation should be used suggests -- submits to us a risk similar to that of a game of Russian roulette.</p>
<p>Where the Commission will simply take our method from one purpose, only later on to use it for another purpose, and thereby, deprive us of something on the order of -- I don't know how much but it may very well be many millions of dollars of return.</p>
<p>Let me say in the very, very few minutes remaining for me because I do want to leave our friends in Columbia some time.</p>
<p>I do want to make a quick reference to the three cases that have been referred to by Mr. Spritzer and let me say those are the only three cases in the whole history of the Natural Gas Act up to the time that we made our filing where a Commission -- the Commission had ever entered an interim order.</p>
<p>There are only three cases, those are the three up to that time.</p>
<p>And as to those three cases, they're discussed in our brief.</p>
<p>I know something about the Panhandle case from which the quotation was read because I try it before the Commission and argued it in the Court of Appeals.</p>
<p>I know that no such issue was there presented as in here, as was here presented.</p>
<p>There, the Commission dismissed four issues one of them being a rate design or so-called you might call it cost allocation issue.</p>
<p>The Court -- the Commission dismissed that issue because it said, look here just 75 days before you made this new increase rate filing, we had decided, we just decided that issue.</p>
<p>We're not going to go into it again.</p>
<p>So, we're going to dismiss that issue along with three other issues that had just been decided in a case -- to the opinion that the Court -- the Commission issued just 75 days earlier.</p>
<p>So that was the end of the allocation issue.</p>
<p>When we went to Court, the Court said, the Commission was well within its rights to do that.</p>
<p>And so, there was no contested allocation.</p>
<p>The Court just simply said there was no contest of allocation issue in that case and the precise question that is presented here was not raised there.</p>
<p>In the Northern case, the Commission in the Northern case as the staff brief admits the precise contention or issues there were not the same as they are here because in that case as in the Panhandle case, the Commission had dismissed the allocation issue because it had been decided and passed on an earlier case.</p>
<p>In the Natural Gas Pipeline case of America, as I stated earlier, there was no allocation issue because they didn't have any zones on their system.</p>
<p>They had one rate over the whole system and moreover they were not -- they were fixing rates under Section 5 (a) where the rates were fixed prospectively only.</p>
<p>Now, just one word then on abuse of discretion, briefly stated here the Commission, and this is the gist of our argument that there was a gross abuse of discretion.</p>
<p>Putting apart the requirements of the Act if the Commission had any discretion to exercise in this case, it abused that discretion because here it had a choice of two alternatives.</p>
<p>One, was to decide the allocation issue on the evidence that it then have before it.</p>
<p>It might have been a very short delay occasion.</p>
<p>By reason of that, I think it took the Commission only four or five -- four months or five months to decide that issue after the third argument at the second time.</p>
<p>I might point out the reason for that being if there was a change in the first note the Commission due to the change in administration.</p>
<p>That was one of the causes for its delay.</p>
<p>All of which could've been avoided if they had omitted the intermediate decision procedure that we requested.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: What change of administration?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: But they could've avoid it not to change the administration and no one suggested that but they could've avoid if the delay had they decided it a year, 18 months earlier.</p>
<p>Now, the Commission had the choice of waiting of few months deciding this case, deciding what method was the proper method to be used thereby not harmed the company, not subject as to the hazard of losing a very a portion of very rate of return which they said we ought to have at the same time, protecting the consumers.</p>
<p>Consumers were fully protected by the refunds, which incidentally were required to pay 7% interest on while we are allowed to 6 1/8% rate of return.</p>
<p>They were faced with that alternative as against the alternative which they did adopt which places us in jeopardy of losing a large part of the rate of return to which we're entitled simply because they wanted to save the few months from getting the -- getting refunds to the customers.</p>
<p>Now, we say that as between those two choices, the Commission abused its discretion when it adopted the former, when it adopted the latter revenue form.</p>
<p>Thank you.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Littman, who in your opinion owns this money that is not distributed to consumers?</p>
<p>There's a very large percentage of our country is on the moot every year and that these things continue over a period of years, of necessity, a very large part of the refunds, I would, think could not be made.</p>
<p>Now, who comes in ownership with those -- do you claim them?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: I wish --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Do you claim them?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: Oh, no.</p>
<p>Oh, no.</p>
<p>No.</p>
<p>I know this much, I have researched this question but if the brief once validly due to the consumers --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: I beg pardon.</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: -- if consumer -- if refunds are validly due to consumers and the consumers have moved away, we never get the money back.</p>
<p>The money either goes to the distributors or goes to the state.</p>
<p>I have never researched that subject.</p>
<p>I know it's a state problem and I'm sorry I'm not prepared to say what the law is.</p>
<p>I would imagine it would be different in various jurisdictions.</p>
<p>But I do know this that in this case the refunds -- part of the refunds that we made are lawfully -- may lawfully be found after the Commission decides the allocation issue to be due to us.</p>
<p>And we urge the Court of Appeals to give us a stay of the Commission's order so as to avoid the difficulty that may come if this order is reversed.</p>
<p>But the Court did not give us the stay with Judge Wisdom dissenting.</p>
<p>He said, the Commission should've put the cart before the horse and he would've given us a stay but the other two judges didn't.</p>
<p>He --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Any idea of that stay?</p>
<p>Did you apply for a stay here?</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: We did not apply for a stay here but we did this, I think the reason the -- I might -- well I don't know whether that's the reason.</p>
<p>But I do know the Commission represented to the Court in our position when it opposed to stay that we could get our money back from our customers, our distributors if we should prevail eventually in this case on this issue.</p>
<p>And I might say that we advice the company when it made the refunds to take the precaution of apprising our customers that we would take that position.</p>
<p>So they would be able to protect themselves and perhaps not pass these refunds on without knowing just what the --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Inaudible) if the state order was denied (Inaudible)</p>
<!-- Horry_S_Littman--><p><b>Mr. Horry S. Littman</b>: We -- we made the -- we had to make and we did make the refunds after the stay order was denied.</p>
<p>And I might say just to clear up one slight imperfection in Mr. Spritzer's statement.</p>
<p>He perhaps left a possible implication that we -- well, I don't say he said, we didn't have to file these interim rates.</p>
<p>He said the Commission permitted us to file the interim rates.</p>
<p>It's true the order, the interim order did use the word “permit” in one paragraph but in the very next paragraph it said, “but if you don't, we're going to take a whole increase away from you.”</p>
<p>So I think that is a clear case of compulsion when we did then file the rates under compulsion.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Smith.</p>
<p>Argument of Brooks E. Smith</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Mr. Chief Justice, Mr. Associate Justices.</p>
<p>At the outset, I think I should identify to the Court the position of the Columbia Gas System Company in this proceeding.</p>
<p>As Mr. Spritzer argued, I don't believe Mr. Spritzer mentioned the Columbia Gas System Company although if you read the Fifth Circuit's opinion below why the Columbia position and the arguments of Columbia featured -- quite well featured in the decision of both of Mr. Justice -- Judge Wisdom and the dissenting judge the Chief Judge Tatel.</p>
<p>When Mr. Rhyne, representing the City of Pittsburgh got up, he confined his mention of the Columbia companies as impugning their motives for being here at all.</p>
<p>Even though if the Columbia companies, who have taken the burden in this cost allocation fight for many, many years wins, it will mean that the people of Pittsburgh and the people of Pennsylvania will be -- will receive more refunds than they will under any other of the cost allocation methods presented in the -- before the Commission.</p>
<p>And it would be presented if the Columbia companies prevail before the Court of Appeals for the District of Columbia Circuit and then go back to the Commission and get their reliefs of the true and correct method of cost allocation applied to the rates.</p>
<p>Now, --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Who should the refunds be made to, the distributor or to the customers?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: The -- in all of the Columbia company cases that we have before the state Commission to see we are regulated by our seven state commissions as well as the Federal Power Commission.</p>
<p>The state commissions have -- will take jurisdiction and see to it that the refunds are passed through to the consumer and the -- if in cases there might be several consumers who have left one jurisdiction going to another.</p>
<p>I believe the ordinary rule is that there will be a credit made to that residence for the next occupant of that particular house.</p>
<p>But it's not perfect but the chances of any great number of consumers being prejudiced because of our present mobile society is not substantial.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Why?</p>
<p>Because they don't move or because they give it back to the dwelling -- to the owner of the premises?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Well, because Mr. Chief Justice, I don't believe that anyone has ever ran a statistic on how many people do move from their homes.</p>
<p>I just believe that the number would be few proportionately, that the great majority, these consumers lived in their homes for many years and if the -- I'm sure the commissions will pass through the refunds to those consumers</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: I happen to know that over -- over the last 25 years in my own state we have 1000 new comers every day who come from other parts of the country.</p>
<p>Now, they use gas too and -- are you going to make the distribution to those people?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Well, if they happen to occupy -- they happen to occupy the residence that was occupied by a consumer who was overcharged why they will get credit and they pass through.</p>
<p>However, the -- when you get these refunds back to the individual consumer, the amount of money to each consumer is very, very small.</p>
<p>I think, in this case, they gave a figure of 15 cents per month.</p>
<p>It's --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: All of which might tend to the conclusion that reimbursement is not the very adequate remedy.</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Oh no, the -- whatever is due, the state commissions takes charge and in our case is particularly they see to it that some adjustment is made.</p>
<p>They all have different ways to adjust them by escalation clauses up and down and by crediting the bills of the future to make up for the overcharges in the past.</p>
<p>They have all different types of methods but the Court -- if the Court pleases, the state commissions do take charge of their responsibility.</p>
<p>I don't say that it's absolutely perfect, but they do a very good job.</p>
<p>Now, Columbia's interest in this proceeding are not identical with Tennessee although we are both correspondents, we do not have the same interest except that we do both believe that the Fifth Circuit's order should be sustained.</p>
<p>The Court might wonder why and what benefit it would be to the Columbia companies to have the Fifth Circuit's order sustained, and there's a twofold way that that is an economic benefit to the Columbia companies.</p>
<p>That is, they will be sure that for the past periods that they will not be made to subsidize other consumers, other zones, if the Columbia companies after having their day in court and having the Commission decide these matters.</p>
<p>And the Court review them and find them -- the Commission's method improper and then the -- our position prevail that we will not be made to make up to Tennessee the 6 1/8% return that the Commission said that they should have.</p>
<p>As far as the second point for the future, if the Columbia companies' method of cost allocation prevails, finally that would mean that the consumers that are served by the Columbia companies will only pay their just due and will not be paying in the future the cost should've been paid to Tennessee in the rates charged to other zones.</p>
<p>Now, Mr. --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Did I understand Mr. Rhyne to say that you were just a conduit or a stakeholder, or did he say that?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: He did say that and that I think ties it up with Mr. Chief Justice's viewpoint to put who gets the refund.</p>
<p>We are a stakeholder and we do pass it through, but if Your Honor please, it's to the best business interest of the Columbia companies.</p>
<p>Moreover, the Columbia companies have a duty to the public to see to it that the rates are as low as they possibly can be.</p>
<p>They have a competitive position.</p>
<p>Mr. Rhyne said that there is a competitive fuel problem.</p>
<p>It's to our business interest and it's in our duty to the public to keep those rates as low as possible.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: You're --</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: There's more to it than just being a conduit for refund.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Your companies or distributing companies?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Both, they distribute and they sell at wholesale.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: And you're regulated I suppose by now only by state but by cities in some case.</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: That's correct, if Your Honor please.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: And when your cost go up you can't always really pass them along, can you?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: That's right.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: When did Columbia first raise the question about the unfairness of this allocation?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: That's what I was going to next develop Mr. Justice.</p>
<p>In 1955, the Commission formally recognized that this issue existed in the last brief case that was settled and finally determined.</p>
<p>That was the so-called Docket G-5259.</p>
<p>The issue was raised in that proceeding but the Commission transferred that issue over to a specific docket, docket number G-11980 and it was in 1955 that the Commission itself formally recognized that the issue prevail -- existed.</p>
<p>And there was in that same case that Tennessee tried to get made a motion for interim rates and the Commission denied that motion because it said it was improper and that matter was presented to the court below and commented upon in the decision below.</p>
<p>In 1957, the Commission acted to put this cost allocation in this Docket Number G-11980 and it was to permeate, it was to run through all of the other rate cases that followed that were then existing and have since been filed, there are three of them.</p>
<p>Now, as I say, Columbia is not merely being litigious and it's not a mere question of a fight on different mathematical methods of cost allocation.</p>
<p>There's more to it than that.</p>
<p>A little bit of history has to be presented to the Court to see why Columbia companies feel so strongly about this.</p>
<p>At the outset of Tennessee's corporate existence, they sold most of their gas in West Virginia which was then carried on into Ohio and Kentucky and Pennsylvania.</p>
<p>And about 1950, the complexion started to change.</p>
<p>Tennessee begun to expand to new market.</p>
<p>They went up to New York and New England also up into Canada and during that period of 1950 through 1958 when this expansion was going on to other markets, they did not expand a very greatly if at all to sell more gas to Columbia.</p>
<p>But even though the expansion and the cost multiplied during that period, Tennessee filed a series of rates ever since 1947.</p>
<p>And those rates fell disproportionately upon Columbia.</p>
<p>Now, there's another factor in this history and that is apparently the new -- the expansion in the New England didn't pay out the way they thought it would during this buildup or development period.</p>
<p>And so we have the case where Tennessee was not making such a good sales picture in the northeast and so to make their overall return, we felt that the facts show, that the rates seems to be falling disproportionately on us.</p>
<p>That's what gave us the impetuous to get in and try to see what was causing this and we fear that we were being made to subsidize the expansion into other markets.</p>
<p>We didn't feel that should be done.</p>
<p>It's not that we don't want New England to have as low of rate as they possibly can but we think that if the expansion was improvident that it should be Tennessee that would have to absorb the difference and not Columbia companies and the other companies that serve in middle of Appalachian area.</p>
<p>Now, --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: I would think that would make your interest more identical with say the City of Pittsburgh than it would with the pipeline company.</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: That's true and that's why it puzzles me to see the City of Pittsburgh taking an opposite view.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: But have you been on their side of the case?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Pardon me?</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Have you been on their side in this proceeding?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Well, it's not in this proceeding.</p>
<p>They should be on our side because we have taken the burden of going forward and trying to get a fair complete determination of the cost allocation issue.</p>
<p>Now, most of my time was taken up, so I have to hurry along but -- and hit some legal points that were covered by Mr. Spritzer.</p>
<p>Mr. Spritzer seemed to argue that the burden of proof was solely upon the Natural Gas Company that was filing the higher rate, Tennessee.</p>
<p>Well, now Section 4 (e) does state that but this is a little different.</p>
<p>It's not that the burden of proof doesn't lie with Tennessee but that doesn't mean that the sole right to present evidence is Tennessee.</p>
<p>It's not that the Tennessee method of cost allocation raised this issue for the first time.</p>
<p>The Commission took the issue, recognized the issue and put it in this docket number G-11980, and raised that issue knowing that the Columbia companies have been complaining for years that they were being made to subsidize the undercharged zone of Tennessee.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: Doesn't your argument (Inaudible)</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Well, if Your Honor please, the question of whether New England is undercharged or not must depend upon how the cost are allocated to the zones.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: On the allocation?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: On the allocation.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: For the reduction of rates (Inaudible)</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: That's right.</p>
<p>We are for the reduction in rates in our area Zones 2, 3 and 4 but we want the customers in Zones 5 and 6 to pay their fair share because otherwise if they don't pay their fair share it's either Tennessee or some other customers in other zones that pay.</p>
<p>The difference is they -- when you -- the Commission decides the cost, there's a certain -- there might be a certain reduction in total overall cost.</p>
<p>Now, that doesn't mean that those costs should be distributed proportionately.</p>
<p>Some zones might not be entitled to recover any.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: (Inaudible) order, issued order and reduce these rates with this order.</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: We -- the order the reduced the rate only covered two items, the rate of return which we took no part, we did not object to the Commission's determination that 6 1/8% return was a just and reasonable rate of return.</p>
<p>So we did not oppose the Commission's order in that respect.</p>
<p>We did oppose the only other item in the Commission's order in which they said now, take this reduced cost of service and use the contested method of cost allocation that Tennessee used and was still being tried in another administrative proceeding and now you reduce your rates accordingly.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: That you're litigating, are you not?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: That -- that we're litigating.</p>
<!-- Arthur_J_Goldberg--><p><b>Justice Arthur J. Goldberg</b>: The cost allocation.</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: That's right but it permeates the underlying case whatever happens in that cost allocation case it's still not final must be applied to the underlying case.</p>
<p>And that's where the rub comes.</p>
<p>Someone is going to get hurt.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: May I ask you, you said, what was the law in Ohio about where this money went?</p>
<p>Do you know about the other states?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Well, I do know that, for example, in Pennsylvania, the refunds that were made to Columbia from Tennessee in the past are now being given credit on the future bills to the retail customers of Pennsylvania.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Why does the Manufacturer of Light and Heat Company to do business?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: They do business in the States of Pennsylvania and West Virginia.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: That's your client?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Yes, Your Honor.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Then the Ohio (Voice Overlap) --</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Ohio fuel.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: -- are they subsidiaries of the Manufacturer?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: No, they are subsidiaries of the Columbia Gas System in Columbia.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Columbia Gas System?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Yes sir.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Are any of these other companies in the Northeast and so forth subsidiaries of Columbia?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: No, just the Columbia companies comprise the seven state, Mid-Atlantic area, Kentucky, West Virginia, Virginia, Ohio, Pennsylvania, parts of New York and parts of the District of Columbia by whole through wholesale.</p>
<p>They sell for wholesale to (Voice Overlap) --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: And Kentucky Gas is a quite a different company?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Quite a different company.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Inaudible)</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Well, Mr. Justice White whether Tennessee has the money or not is something I can't answer.</p>
<p>But I do know that if we -- if the Columbia companies prevail on our appeal in the cost allocation fight that are still before the lower court then the cost will be remanded to the Commission.</p>
<p>Now, at that point, the Commission will face with this problem.</p>
<p>It will have told Tennessee that if it is entitled to 6 1/8% return, now it will for the future.</p>
<p>I'm not going to get into the difficulties for the past which we've discussed on a refund but for the future, it seems to me that then when the Commission determines the allowable cost of service, the aggregate.</p>
<p>And having told Tennessee that it's going to permit them to earn 6 1/8% return, they're going to do everything they can on remand to work up a cost allocation that would permit Tennessee to get the 6 1/8% and take it out our eyes.</p>
<p>That's just the point.</p>
<p>I see my time is --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: (Voice Overlap) the law prohibits them from doing that, does it not?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: The law theoretically prohibits them from doing that but the Section 4 (b), the section that specifically prohibits the Natural Gas Company from giving an undue rate preference to other customers, in other zones, specifically, that's not self executing.</p>
<p>The customer companies of Natural Gas Company have to get in there and fight.</p>
<p>They have to recognize the issue and do all they can to have their position prevail before the Commission the lower tribunal.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Isn't the Commission prohibited from allowing retroactive rates?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Well, the Commission --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: This would amount to, would it not?</p>
<p>That they jack your rates up in order to take care of the expense of Tennessee, they would be giving Tennessee dating back their rates to your detriment, would they not?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Well, --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Isn't that prohibited by statute?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Yes, that's true, Your Honor.</p>
<p>But I'm afraid the Commission has compromised itself by first deciding the --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: You mean they have a conflict on interest there?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: The Commission will have compromised itself because it will have determined finally that 6 1/8% should be allowed in Tennessee and there it will be searching ways.</p>
<p>In other words, we won't come before that tribunal in a mutual position along with all the other parties.</p>
<p>We will have to be fighting against this issue that was decided out of line.</p>
<p>The whole point of the error I think of the Commission is that it short circuited the whole administrative process and damaged us in the process.</p>
<p>Thank you.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: May I ask you one more question.</p>
<p>It may be implicit to go to the (Inaudible)</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: No.</p>
<p>It is not, if Your Honor please.</p>
<p>If the cost allocation --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Inaudible)</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: No.</p>
<p>I want to explain that there is another way that they could've acted.</p>
<p>They could've granted an interim rate reduction order in this very case if they would've taken the Columbia method of cost allocation.</p>
<p>And the cost allocation method, that is the other extreme applied it to the reduced cost of service and then they would've got a bracket, a maximum and a minimum for each zone.</p>
<p>And then they could have ordered reduced rates within that bracket.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Was this proposed?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: No, this was not proposed.</p>
<p>But --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Inaudible)</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: This is perfectly valid because just September 14 to this year, the Columbia companies entered into a settlement, which did just that.</p>
<p>The Columbia had a cost allocation fight on its hand with its customers, different entirely than this.</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: (Inaudible)</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: There are many ways that they can do that.</p>
<p>The principle, the cardinal principle Mr. Justice White is that they don't act so as to prejudice litigants.</p>
<p>There's always in the position of the litigants.</p>
<p>There's a --</p>
<!-- Byron_R_White--><p><b>Justice Byron R. White</b>: Even though in Tennessee?</p>
<!-- Brooks_E_Smith--><p><b>Mr. Brooks E. Smith</b>: Yes, in Tennessee.</p>
<p>Thank you.</p>
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Tue, 25 Sep 2012 16:54:27 +000083193 at http://www.oyez.orgF. P. C. v. Transcontinental Gas Corp. - Oral Argument, Part 1http://www.oyez.org/cases/1960-1969/1960/1960_45/argument-1
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Case:&nbsp;</div>
<a href="/cases/1960-1969/1960/1960_45">F. P. C. v. Transcontinental Gas Corp.</a> </div>
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Related Transcript:&nbsp;</div>
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Transcript:&nbsp;</div>
<p>Argument of Rankin</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Number 45, Federal Power Commission, Petitioner, versus Transcontinental Gas Pipe Line Corporation, et al. and number 46, National Coal Association, et al., Petitioner, versus Transcontinental Gas Pipe Line Corporation et al.</p>
<p>Mr. Solicitor General.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Mr. Chief Justice and may it please the Court.</p>
<p>This case involves the Natural Gas Act.</p>
<p>It is a question of a certificate to transport gas under Section 7 of that Act.</p>
<p>The particular part of the application that's involved here is what is known as the transportation of X-20 gas, which is somewhat unusual and I'll try to describe it.</p>
<p>Under the tariff, proposed tariff, the X-20 was gas that Consolidated Edison Company, New York, bought directly from the producers in Texas at $19.25 for 1000 cubic feet to have transported by the Transcontinental Gas Pipe Line Corporation to New York City with the restriction on the use of the gas that it could only be used as fuel for boilers.</p>
<p>The record is clear that the purpose of the restriction was for the producers to avoid any regulation of the price of their gas.</p>
<p>The examiner in considering it -- well there's a further factor that is of importance, and that is that Transco, Transcontinental Pipe Line Company, agreed that for a period of 60 days at the election of Consolidated Edison, they would furnish their own gas that could be used for resale in the New York City area, to Consolidated Edison in the portion of the pipeline that had otherwise been provided under this X-20, for the transportation of this gas, Consolidated Edison that Consolidated Edison bought directly.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: I don't quite understand that.</p>
<p>They do that for 60 days?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Well, whatever Consolidated Edison elected to do so.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Would that be presumably for a peak period?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right.</p>
<p>That is what is called the peaking gas.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: I see.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Well then what happens, Mr. Solicitor, what happens to the X-20 gas?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Well, during --</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: It's not been delivered?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That isn't delivered.</p>
<p>It's what they --</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Is or is not?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Is not.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Is not.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: It's, what they call, a drawback and it's though the pipeline is there with that space available for Consolidated Edison to use and instead of using the X-20, they put into a Transco gas that can be resold.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: But that -- is there a condition against the use of that Transco gas for fuel or boilers?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: No.</p>
<p>It -- it can be resold.</p>
<p>It could be used for boilers too.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Oh, I see.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: But the purpose of it, the purpose of the provision is to be able to resell -- sell it, to take care of the peak loads during that period that Consolidated Edison would have.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: The Transco would sell it or Edison?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Consolidated Edison would sell it in the New York market.</p>
<p>Transco would merely carry the gas but it would be gas that Transco purchased itself and would be subject to resale, as distinguished from the restriction on the Consolidated Edison purchased gas which could not be resold in the New York market but had to be used according to the terms of purchase for a boiler fuel.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Now this Transco gas, I gather, the price of that is regulable?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: It is regulable, yes.</p>
<p>And there was a general tariff covering that.</p>
<p>But the tariff that they -- that Consolidated Edison purchased that gas under was one in -- that was interruptible.</p>
<p>That is they had a right, Transco had a right to take the regular gas of what's called CD under the tariff and interrupt the Consolidated Edison being able to have that gas in order that they'd be able to put it in storage during a part of the year.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Does that mean this is significant for the spending of gas, significant for the use in the United States?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Well it is because of the peaking provision to understand, because that was one of the reasons, the justifications, by Consolidated Edison and Transco for having this arrangement.</p>
<p>Now as a matter of fact, it does seem important as to whether or not, air pollution was truly an important part of the consideration in this matter.</p>
<p>And I think that as I develop, that you'll see that the air pollution was an explanation or a justification that they gave for wanting this particular tariff approved by this transportation certificate.</p>
<p>But as a matter of fact, it did not loom nearly as important as the opportunity to be able to buy the gas direct without interference.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Does the volume of X-20 gas as against the 60-day gas, is that a relevant factor in your -- in the problem?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: It becomes --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: I mean it depends how much is --</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: It becomes --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: -- the relative -- the relativity volume?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: It becomes relevant in regard to how they might use it for air pollution that they really meant, that air pollution was important in this consideration.</p>
<p>Now this particular volume we're talking about that they contracted for, was 50,000 Mcf. of gas per day that they could -- they bought in Texas under this price of $19.25, to be used for boiler fuel.</p>
<p>There, they had a provision that they could get during the peaking period for the 60 days at their election up to 50,000, the same amount, from Transco of resalable gas.</p>
<p>Their testimony was that they were going to use only 25,000 because they were going to use 25,000 of the X-20 gas that they bought themselves in the boilers, in two boilers at water side, in order to take care of the air pollution and the rest, they would proceed to use for resale for their peaking purposes.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: What if -- I probably don't understand this.</p>
<p>But if they were going to use a fraction, in a sizable fraction, of the peaking supply in relation to air pollution, then that is just so much more in order to deal with it or to avoid air pollution.</p>
<p>Then they add that on to the main claim that they make, that they bought the 50,000 Mcf. for that purpose.</p>
<p>Am I wrong about that?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Well, it's clear in the record that they didn't intend to use this peaking gas from Transco for air pollution.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Well I thought you just said they use 20 – they were going to use 20,000?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: 25,000, but that was still the same gas that they had purchased directly from the producers at $19.25 and that they had to use for boilers.</p>
<p>Now what they used over the 25,000 was going to be gas that they could resell, and they wanted to have the benefit of that.</p>
<p>And it was a beneficial transaction to them because that would help them at least to the extent of 25,000 Mcf. to take care of the greater demands of their consumers in the New York market for gas that could be burned by the consumers.</p>
<p>That is gas for resale.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: So that they had themselves against resale potentially by the 60-day provision.</p>
<p>Is that right?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right.</p>
<p>And that was --</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: Same gas, same type of gas?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Well --</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: Peak gas is the only gas?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: It's all the same burnable, but there was no restriction on the resale as to the $19.25 gas, the X-20 gas.</p>
<p>And the gas they would get from Transco could be resold.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But there -- I understand and I'd like to know too Justice Clark's question.</p>
<p>Was the quality of gas, forget the price, was the quality of gas the same?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Apparently.</p>
<p>There's no dispute in the record that there was any difference.</p>
<p>It's --</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: There is a technical proposition that they could resell because they own the peaking gas, they could resell it.</p>
<p>It had nothing to do with the quality of the gas though?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right.</p>
<p>Now the record is also clear although it is not involved in this particular case, but it has important bearing upon the decision of the Federal Power Commission that the program was within two years to increase this X-20 gas that they would buy directly and then have a restricted use of it to a 120,000 Mcf.</p>
<p>That is from 50 -- 70,000 Mcf. more within a two year period.</p>
<p>But -- and it was inferred at first that they would use this to take care of some more of the air pollution problem.</p>
<p>But the testimony was that when they got the whole 120,000 Mcf. of the X-20 gas, they would still, during certain periods of the year, use only 25,000 for air pollution purposes.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Mr. solicitor, I am about a little confused and much confused.</p>
<p>But I don't quite understand this.</p>
<p>I thought you said to us that they take 25,000 of this X-20 gas, is that it?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Yes, Mr. Justice.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: And is that the maximum that they've been using for boiler fuel?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: No.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: In other words that whole 50,000 that they get, which is conditioned for use only as boiler fuel, they are in fact, using as boiler fuel?</p>
<p>None of that can be resold, isn't it?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: No, it cannot.</p>
<p>But there would be -- during the peaking period, they wouldn't take the whole 50,000.</p>
<p>During part of the year except the peaking period, they would take the 50,000 --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Right.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: And -- and use it for boiler fuel.</p>
<p>They were using large amounts of boiler fuel other than for air pollution at other stations.</p>
<p>And this particular station involved here, well there are two of them on the east river, one at 40th and the east river near the United Nations building, which would need 50,000 to take care of eight boilers that were bad.</p>
<p>Two of those were the only ones that there was a -- there wasn't even a violation of the ordinance, but they were worst and they would -- they were the real problem and they take 25,000 Mcf. to take care of.</p>
<p>The others were probably, it's a business reason for getting the others also to take care of gas according to the record or to have them burn the gas in the boilers, because the record is clear that the 71 and 72 boilers are the ones that are making the fly ash difficulty that is bothersome to the city.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Mr. General, now suppose in this air pollution issues were not in case at all and these people have said, "We want this gas for boiler purposes and not resale for these keepers in coal."</p>
<p>Would your case be any different?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Well, I don't think it is.</p>
<p>I do think there is a problem --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: I didn't take your point and as I was confused as to with all the talk and the brief was and that you're spending time on knowledge for what bearing really on this basic issue, the air pollution issue on that.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Well, I don't think that in the base -- in regard to the basic issue that air pollution is anything except something too confusing, because I don't think there's any validity to the point.</p>
<p>On the other hand, I did feel that I had to deal with it because there is an act to the Congress that says that the United States has appropriated $5,000,000 to cooperate with the states, that the states have a primary obligation about air pollution and whatever research could be developed, in that regard, the United States would cooperate and then the President of the United States issued the Executive Order in which he directed that people in the United States Government cooperate with the states and cities to see that whatever could be done about our own industry that is governmental industries, did not contribute to air pollution.</p>
<p>So I thought there was a duty to try to show to the Court that air pollution was not a real problem in this case.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: There's a difference between validity to the point and relevance to the point.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Yes.</p>
<p>I view that Mr. Justice.</p>
<p>But I think that the basic issue in this case is whether or not this end use, that is the difference between the use of gas for boiler fuel which is considered as an inferior use was so determined by the Federal Trade Commission Report in 1936 which this Court has said, and it's recited in the 1938 Natural Gas Act, was the reason for the Natural Gas Act to be passed.</p>
<p>And on the -- on the considerations of conservation, the superior use as compared with the inferior use, and whether that can be considered by the Commission in regard to determining whether certificates should be issued, is the basic issue in this case.</p>
<p>Now the Commission did determine that it would not issue a certificate in this case, and this is a Section 7 application, I want to make it clear.</p>
<p>It's not a rate case application.</p>
<p>It's a certificate for transportation in which Section 7 comes into play.</p>
<p>And the Commission held that in this kind of a situation, there were four basic reasons why in the public convenience and necessity under that condition as provided in Section 7, this -- at this certificate could not be required by the public interest -- by the public convenience and necessity.</p>
<p>Because, first, they felt it would breakdown the practice over a period of some 20 years of the purchase of gas and resale by the transmission companies and would be damaging to that established price.</p>
<p>Secondly, they felt that it would inflate prices in competition to have these various large users go into the marketplace and bid against the pipelines to require gas and resell it in this manner.</p>
<p>And it would drive the prices up.</p>
<p>Third, they said that the small consumers wouldn't have the buying power to engage in any such practices as this and they would be forced to have -- to acquire their purchases through the transmission companies of the pipelines in the same way and would be adversely affected by the fact that prices and the pipeline gas would be driven up, but they couldn't compete by going out and trying to get the gas at the lesser price.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: So it is kind of a trial, are you --</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: The second --</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Yes.</p>
<p>They further took the position, this was an inferior use that the pollution issue was not a valid one under the showing made, and that it was therefore, not justified under their prior holdings and positions that boiler use is an inferior use unless there's special justifications, there should not be -- that use should not be certificated.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: General, I don't know whether it's pertinent or not, but is there any differential in this case as between the boiler gas and the gas that's for resale?</p>
<p>That is so far as the price paid for it.</p>
<p>I don't know -- I don't know whether it's relevant or --</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: There -- there was.</p>
<p>The price that they paid in the field was higher, $19.25.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Yes.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: And the gas for -- that CD gas, the Transco sold generally for resale, was based on accumulation of a number of prices that they put together over the years of the -- substantially below that.</p>
<p>The Commission was trying to hold gas in this particular area where Consolidated Edison went in and bought and paid $19.25.</p>
<p>They were trying to hold it below 18 cents.</p>
<p>Consolidated Edison, in order to get this large chunk of gas under these terms that would not be regulated, went in and bid $19.25 and got it.</p>
<p>And that had the effect of lifting prices in that area.</p>
<p>The -- the testimony from Transco on the other hand, was that they couldn't -- they did not dare try to buy this gas at -- in competition with Consolidated Edison and I think the inference is fair, probably lower than even $19.25, because it would escalate other prices they had on gas.</p>
<p>But there's no question to what they paid substantially, above the general market that the pipelines had been paying for this gas, but the producer said, “We don't want any regulation as a part of it.”</p>
<p>And they gave them that part of the agreement so they wouldn't get regulated and agreed to use it for this limited purpose.</p>
<p>Now, it's also clear this doesn't help Transco at all on getting its load factor railings like this type of gas sometimes does where there's a direct purchase and its run through the pipeline.</p>
<p>It doesn't help on that kind of a thing.</p>
<p>It does give them more money, because they get paid a fair price and there's no controversy about that for transporting the gas.</p>
<p>But the Court of Appeals reversed the Commission and held that it had no right because of what it said the legislative history was, to consider the conservation factors that is the end use of the gas in any way, that if could -- couldn't consider whatever was done about buying the gas.</p>
<p>It couldn't consider whatever was done about the use of the gas.</p>
<p>The only thing it had a right to do was consider whether or not the gas could be transported, and it said that in regard to that, it was to examine the conventional, as it described it, factors.</p>
<p>Now, it's the position of the Federal Power Commission that when the Court of Appeals so held, it disregarded the true legislative history of this Act.</p>
<p>In the first place, the 1938 Act was passed as you will recall, with a provision that the Commission would have jurisdiction of certificate cases in regard to transportation only where there was another gas line -- transmission line in the area and it would not have in other cases.</p>
<p>Now, it was found in 1942 that that was -- in the experience up to 1942, but that was not an adequate solution for the problems in the industry.</p>
<p>And there was a considerable -- there were recommendations that the conservation factors of having a number of lines come in to a particular area could not be adequately dealt with.</p>
<p>There were also the factors of the other fuel interests and the transportation interest of other fuels, were not permitted to intervene under the 1938 Act and present a showing as to the fact that coal or the transportation of coal could adequately take care of the fuel needs of a particular proposal of a certificate or application.</p>
<p>And therefore, that factor could not be properly taken into account by the Commission the Commission had so taken that position in some of its holdings.</p>
<p>And so that Congress, with expressed reference to conservation, had amended the Act so as to make it possible for the Commission to go into any application for extension or new transmission lines wherever there was application, wherever there was an attempt to do that.</p>
<p>And also, to allow the intervention of other fuel interests and transportation interests to show that other fuels could be used to greater advantage and conserve the gas.</p>
<p>Now, the Court of Appeals relied upon the 1944 statement of the Federal Power Commission in regard to conservation in which it had said in a report to Congress that it didn't have the comprehensive right to control conservation and disregarded the footnote to that statement, which was clearly set out to the effect that they didn't have the right to control the direct sales to industry or to suspend the rates on indirect sales to industry through the pipeline.</p>
<p>And it made it explicit that it was the comprehensive control of these other things that it needed.</p>
<p>And in 1944, the same year, the Federal Power Commission in reporting on a resolution by the Senate, which suggested a complete examination or investigation by the Federal Power Commission into conservation of gas and other fuels.</p>
<p>In reporting on that, the Federal Power Commission expressly told the Senate Committee that it had the power to regulate and it considered the end use under in certificate cases, and that it needed this comprehensive power to consider -- to be able to protect conservation in regard to direct sales to industry and suspension of rates on indirect sales.</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: That it direct sales where there'd be no certificate acquired.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right, Mr. Justice.</p>
<p>And indirect sales where they can't suspend it, even though there is a certificate and they go under Section 5 for a regulation.</p>
<p>So that, the Commission was explicit about this, then time after time, they have taken a similar position and they have reported the various cases they've taken, the fact that they asserted the right to consider the end use of the product in regard to inferior and superior uses of gas and made a claim that they considered boiler fuel as the Federal Trade Commission had said, an inferior use.</p>
<p>Now, the practices of the Commission were that they did allow certificates for boiler fuel in various situations and those are set out in detail in the brief.</p>
<p>But there had to be a special justification for the use, this inferior use, or they would not allow it and some of the special justification was in a Transco case.</p>
<p>Transco, in its earlier applications, made justification showing that they needed the right to sell for industrial purposes in order to bring the rates down to their resales to other consumers, because of the lack of volume during their valley periods or their low periods in regard to resalable gas.</p>
<p>And therefore, they justified on that basis, but even then, the Commission said to the time after time, you should get busy and establish some storage, so you don't have to sell all this gas for this inferior purpose.</p>
<p>But you can put it in storage during your valley periods and then sell it out during the peak periods, sold to the consumers for the highest use, and therefore, conserve the gas.</p>
<p>And they pressured Transco time after time on that and finally in this application for the first time, Transco has come forward with what was called the Leidy Storage Project.</p>
<p>Now, this proposal is damaging to that project amongst other things, because it doesn't conceive that this particular gas that they will get during the 60-day peaking period or during the other period that they use this part of the pipeline which is the valley period, will go into the Leidy reservoir, but it'll be used for the special advantage of Consolidated Edison under this X-20 tariff.</p>
<p>But the Commission had insisted constantly as one example of their position that Transco get more into the storage business for the conservation of gas and it finally come around to that point.</p>
<p>Now, they'd also allowed it for the atomic energy plant at Oak Ridge.</p>
<p>They've allowed it for other installations where they needed to raise the amount of their volume, so as to reduce the price of the gas generally to the consumer.</p>
<p>They had allowed it for special industrial purposes, where it was shown that the gas, itself, would form chemical compound or help in that regard with the -- in the manufacture and so had a contribution other than just the use for the purpose of producing steam, which is a low value use as far as the amount of return from the Btus in it, and each of those situations we have analyzed at some length.</p>
<p>Now in regard to the legislative history, there's also expressed specific examples where the congressmen had come forward with the proposal to prohibit the Commission from considering end use, four different times and the Congress had not yet allowed it.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: We'll recess now.</p>
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Tue, 25 Sep 2012 22:35:30 +000082932 at http://www.oyez.orgF. P. C. v. Transcontinental Gas Corp. - Oral Argument, Part 2http://www.oyez.org/cases/1960-1969/1960/1960_45/argument-2
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Case:&nbsp;</div>
<a href="/cases/1960-1969/1960/1960_45">F. P. C. v. Transcontinental Gas Corp.</a> </div>
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Transcript:&nbsp;</div>
<p>Argument of James Lee Rankin</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: General, you may continue.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Mr. Chief Justice and may it please the Court.</p>
<p>Before proceeding my argument further, I'd like to go back to the question of Mr. Justice Brennan, and I was suggested during the recess that I may not have made my answer clear or may have not answered it correctly or may have been misunderstood.</p>
<p>In regard to the direct sales, I meant my answer to mean that there was a power to regulate the transportation, but not the rates for such direct sales.</p>
<p>I don't know whether my answer meant that to you or not, but that is the correct answer and that's what I intended by my answer.</p>
<p>Now the Court of Appeals didn't think that the Hope Natural Gas case was of any help in the decision of this case.</p>
<p>Although they referred to it, we think that it followed -- it did not decide this particular question, you recall in that opinion, the Court did say that while conservation was not a factor in determining just and reasonable rates, and there were two strenuous dissents in which Mr. Justice Jackson went at some length, talking about the importance of conservation in preserving this important fuel for superior uses.</p>
<p>And Mr. Justice Frankfurter also brought the dissent and joined in Mr. Justice Jackson's dissent there.</p>
<p>But in addition, the Court in the opinion went into the fact that in a transportation case and certification, that under Section 7, it was proper to consider conservation considerations and the Power Commission had that power and referred in a footnote to statements by the Power Commission in that regard.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Now it's unquestionable of course that the Commission has no direct power as such over the -- over the use by customer of gas.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That is correct.</p>
<p>And it has no power as such to regulate the rates.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: At which he buys it.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Which he buys, where there's this kind of a transaction.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Yes.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: But the position of the Commission is that in determining the public convenience and necessity in whether to grant a certificate --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: For transportation?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That's right.</p>
<p>They have the right to consider the use that is to be made of the gas as to whether or not it is in the interest of public convenience and necessity.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: In other words, if this gas had been purchased as it was in Texas by Consolidated Edison and transported by a ship, by a tanker around through the Gulf of Mexico and at the coast of New York and delivered to Consolidated Edison up there, The Federal Power Commission wouldn't be in the picture at all.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: No, I don't concede that point, Mr. Justice Stewart, because the Act says transportation interstate; it doesn't say by pipeline.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: So, it wouldn't be the use --</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: So it's still a question.</p>
<p>Now the examiner did use that example as though it would be conceded that there was no right to regulate, but the Act is specific in its terms in saying transportation interstate and we certainly would insist that while it hasn't been ruled on by the parties.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: I guess it's not done, is it?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: There -- I think there are some possibilities of liquid gas and in relatively small amounts and it, as we say in the footnote to our brief, is a developing industry, and so -- but we do not concede, and we make it expressed in the brief that we do not concede that position.</p>
<p>Now the East Ohio case was completely disregarded by the Court of Appeals, it didn't even refer to it.</p>
<p>And you recall there the -- there was a basic issue in regard to whether or not, there had to be a coupling of the regulation of rates with transportation, in order to be able to control or have the power to control the transportation and the Court held two things.</p>
<p>One, was the right to regulate the rates within the State and also the power to certificate, power in the Commission, to certificate the transportation independently.</p>
<p>And in the Hinshaw Amendment when the Congress choused the holding of the Court in regard to the right to regulate the rates intrastate in such a transaction, it did not change at all, the power of the Commission to, as it was recognized by this Court, to control the transportation featured by the certification under Section 7.</p>
<p>Now, it's claimed that despite all of this, it is unreasonable; it's arbitrary because there isn't any showing that anybody else is going to do what the Consolidated Edison is trying to do here.</p>
<p>In the first place, they assumed that that price is so high $19.25 and the Transco prices were substantially less at the time that nobody else will be attracted to it.</p>
<p>Now, in taking -- you have to take into account in that regard, that Transco has raised its price twice so that now, with the compromised rate, and they haven't got a final rate on the last application, the rate is $37.06 as I recall against a little over $42, it's about in half.</p>
<p>I think it is $42.50 for this, with the transportation charge and the cost of the product together.</p>
<p>So that there's about five cents differential as distinguished from what it was more than 10 or 12 cents before.</p>
<p>So that the closer it gets to that $42.50 rate, the more attractive this is going to be.</p>
<p>But beyond that, at the very time, they had an application for boiler fuel in a substantial amount before the Commission, for VEPCO.</p>
<p>They had testimony of Long Island Lighting that they had been trying to make direct purchases, so that they could be able to have a comparable transaction to this.</p>
<p>They had testimony that Transco had told its other large consumers that they had better try to see what they could do by buying directly and handling the same kind of X-20 transactions.</p>
<p>They had the testimony that public service of New Jersey had been informed that if they'd -- if this was approved, they better get busy and buy directly too.</p>
<p>They had the due power application in regard to use of large quantities of boiler fuel for that power operation.</p>
<p>They had the -- they have the present applications of El Paso Natural Gas to use for their compressors, large quantities of boiler fuel by direct purchase and a claim that they're exempt from regulations just like the X-20.</p>
<p>And now, the Southern California Edison has come out for some 335,000 Mcf. per day that they want to take around through Mexico and up the coast in order to avoid the regulation by the Federal Power Commission at all.</p>
<p>Now, this is a crucial issue to the Federal Power Commission of its power to determine in the interest of this country, whether or not, this gas shall be used in such a manner that it is not in the public interest and convenience and necessity or is, and the statute says that, "Unless, it is required by the present or future public convenience and necessity of the country, that it shall be denied, is that specific.</p>
<p>And this power should be recognized in the Commission in accordance with its holding."</p>
<p>I'd like to reserve the rest of my time and I've divided part of it with my co-counsel.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. McGrath.</p>
<p>Argument of Jerome J. Mcgrath</p>
<!-- Jerome_J_Mcgrath--><p><b>Mr. Jerome J. Mcgrath</b>: Mr. Chief Justice and may it please the Court.</p>
<p>I would like to advert to one preliminary matter, it was brought up by the Solicitor and in the questioning of Mr. Justice Brennan, having to do with the CD-3 gas as compared to the X-20 gas, that is the subject matter of Con Edison's and Transco's application here.</p>
<p>Now the CD-3 gas is so-called contract demand gas, which the distributor, served by the Pipe Line Company, can use for distribution, for resale to the general consuming public.</p>
<p>However, it has a limitation in the tariff which restricts the use of that gas as boiler fuel to a certain limited volume per day.</p>
<p>So that the pipeline company can take that gas end use it for storage purposes during the warmer periods of the year.</p>
<p>Now, because of that specific limitation in Transco's tariff in the CD-3 -- under the CD-3 rate, it was precluded from using the 25,000 Mcf. of that per day in the boilers at the waterside station in boiler 71 and 72.</p>
<p>Now, under the X-20 transportation arrangement, Transco is given the privilege which none the other customers of the pipeline company have to not only have the X-20 transportation gas but equivalent volumes on a 60-day basis of CD-3 gas unrestricted as to use.</p>
<p>In other words, the boiler fuel limitation is removed and so is the restriction that the producers imposed on the X-20 gas removed, so that it can be distributed to the general public.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: What does that have to do with the basic issue in this case?</p>
<!-- Jerome_J_Mcgrath--><p><b>Mr. Jerome J. Mcgrath</b>: It -- it has this to do only Mr. Justice Stewart that Con Edison seems to place great emphasis and did so at the Commission in trying to promote this X-20 arrangement, otherwise, I don't say it has anything to do with the specific issue that's before the Court today.</p>
<p>The -- adverting now to the ruling of the Third Circuit.</p>
<p>The Third Circuit's ruling is much broader and transcends the particular issues that are in this case today.</p>
<p>The ruling of the Third Circuit is that the Commission has no power whatsoever to consider end use conservation matters in its -- in the exercise of its certificate powers under the Natural Gas Act.</p>
<p>Now that not only applies to the transportation of gas, but this was made clear in the Lynchburg case decided several months later, it applies to the resale gas as well.</p>
<p>The decision completely ignored as the Solicitor General stated, one of the primary objectors of the 1942 Amendment to the Act.</p>
<p>Now this Court will recall as it outlined in the Hope case that the 1942 Amendment was bought about at the insistence of the Commission, competitive fuel industries, the gas industry itself, because of the specific limitations on the Commission's authority under the old act, the 1938 Act.</p>
<p>Now the broadening of the Commission's powers in 1942 was to enable the Commission, number one, to give consideration to the broad, social, and economic effects of the use of various fuels with which natural gas, as a fuel, would be competing and to take into account the conservation aspects of the problem, recognizing that natural gas was an exhaustible natural resource.</p>
<p>Now one of the first cases that came up under the Act was the Kansas Pipe Line and Gas Company case in 1938.</p>
<p>And it was that case in which the Commission held, it didn't have this authority and it was that case which brought about the 1942 Amendment.</p>
<p>Now our interest in this case, as a competitive fuel, is that Congress has expressed concern over the fact that the expansion and extension of natural gas lines into competitive areas may have an impact on existing fuel, existing methods of transportation, which, in the broad overall public interest to the United States, should be given consideration.</p>
<p>Now if the Third Circuit's ruling is to be upheld, that would strike out completely any authority of the Federal Power Commission to give effect to end use considerations.</p>
<p>We submit --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Is there -- is there anything in this record, Mr. McGrath as to the comparative price of coal and this gas into Consolidated Edison --</p>
<!-- Jerome_J_Mcgrath--><p><b>Mr. Jerome J. Mcgrath</b>: Yes, Mr. Examiner.</p>
<p>There was a testimony of the --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Testimony. [Laughter]</p>
<!-- Jerome_J_Mcgrath--><p><b>Mr. Jerome J. Mcgrath</b>: Habit.</p>
<p>There was a testimony of the witness Thomas which set forth the comparative fuel prices and it indicated that the cost of the X-20 gas was in the neighborhood of 42 cents roughly and the coal that was used at the waterside station was in the neighborhood of about $42.06 per million Btu.</p>
<p>They are very close in cost.</p>
<p>In other stations of Consolidated Edison, however, coal cost range anywhere from 37 cents per million Btu up to 40 or not maybe with per million Btu, gas cost, the valley gas that they use, interruptible gas that Con Edison use, is around by, if I am correct, about 34.5 cents per million Btu.</p>
<!-- unk--><p><b> Unknown Speaker</b>: (Inaudible)</p>
<!-- Jerome_J_Mcgrath--><p><b>Mr. Jerome J. Mcgrath</b>: Yes.</p>
<p>Yes, sir.</p>
<p>Yes, I would say that Your Honor, yes, sir.</p>
<p>Now the particular case that was confronting the Commission in this proceeding was but another manifestation of a new trend in the gas industry by which producers of gas were seeking outlets which were -- would not subject them to the jurisdiction of the Federal Power Commission.</p>
<p>As this Court would recall in the Phillips decision, it was held that producers who sell their natural gas in interstate commerce for resale, are subject to FPC jurisdiction.</p>
<p>Immediately before this case was -- this application was filed with the Commission.</p>
<p>The Commission had considered a similar transportation arrangement that of Houston Texas Gas and Oil Corporation to bring gas to under Florida. Florida Power Corporation, Florida Power & Light Company purchase gas in the field, engages the pipeline company to transport it, substantial volumes to market, and that was an effort by the producers to get around FPC jurisdiction.</p>
<p>At the time this case was pending, Transco had an application to transport gas from Louisiana to Virginia Electric and Power Company for use as boiler fuel in the power plant of Virginia Electric and Power Company in Possum Point, Virginia.</p>
<p>Duke Power Company, as the record shows, was negotiating with producers for transportation.</p>
<p>As Mr. Rankin pointed out, the Public Service Electric and Gas Company was thinking about doing -- going into the same type of arrangement, but as the record shows in the testimony of the witness Bonaface, they were awaiting to see what the Commission did with this case.</p>
<p>Long Island Lighting Company, another large distributor and power company in the east, was negotiating for transportation.</p>
<p>All of which would have had a serious impact on the coal industry by a reason of the use of this gas in electric generating stations, which is by far the largest single customer for coal.</p>
<p>Now, if the Commission is precluded from giving weight to these factors, from measuring in the public interest in making a value judgment as to whether the use of natural gas as boiler fuel is required by public convenience and necessity taking all of these factors into account, then I say that the Third Circuit has vitiated the 1942 Amendment and has deprived the Federal Power Commission of one of its most important functions.</p>
<p>It would strip the Commission of any real expertise.</p>
<p>As the -- as the Third Circuit ruled, the only thing the Commission could properly evaluate were the conventional factors, a market, a gas supply, rates, all technical factors which the Commission could merely list on a sheet of paper and check off and under the ruling of the Third Circuit, would be compelled to issue a certificate.</p>
<p>Now under Section 7 (c) of the Natural Gas Act, we say that the Commission's functions go beyond the conventional factors, these so-called, technical requirements.</p>
<p>The Commission must give consideration to other aspects of the public convenience and necessity.</p>
<p>And those aspects, Congress has said to the Commission, include conservation, impact on competing fuels, and other matters that are not so-called technical or checklist items of proof.</p>
<p>Now, the respondent Transco, in its briefs, states that the Commission -- or that Third Circuit was right and that the Commission is not required to give effect to these policy considerations which the Commission did take into account, but on the other hand, it says, that the Commission should have taken into account the air pollution law and given policy effect to that or to the antitrust laws, which are filled very much whoever in the case, but they say, the Commission should have given them some effect.</p>
<p>Well if that isn't exceeding, the balance which the Third Circuit has set, that I don't know what is.</p>
<p>Now much has been made of the fact that the Commission did not reach a rational judgment including that the public convenience and necessity had not been shown because of this so-called air pollution argument.</p>
<p>But we submit that the evidence of record is clear that the air pollution argument was greatly exaggerated, that the company had other means by which to solve its problem, one of which it's doing right now.</p>
<p>For years, ever since gas was made available to New York in 1951, it has had substantial volumes of natural gas, on a valley basis, available for use at waterside.</p>
<p>And it did not make use of that gas until 1959.</p>
<p>If my recollection is correct, it was in March of 1959, when Waterside first had natural gas for use in its boilers.</p>
<p>Now, those volumes -- that company had volumes of gas available to it all those years.</p>
<p>We argued on the record that the problem is as bad as you say it is, why didn't you use the gas that was available to you.</p>
<p>And their answer was, "Well, physically, it couldn't be done but we didn't have a pipe down into the station."</p>
<p>Well, they've got a pipe there now and they're using these substantial volumes of gas.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Inaudible)</p>
<!-- Jerome_J_Mcgrath--><p><b>Mr. Jerome J. Mcgrath</b>: Pardon.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: (Inaudible)</p>
<!-- Jerome_J_Mcgrath--><p><b>Mr. Jerome J. Mcgrath</b>: I think, it would probably be less, Your Honor.</p>
<p>I don't know what the cost of the facility was, but if they're using valley gas, under the CD-3 rate, the average cost is less than the X-20 gas.</p>
<p>We submit that the policy considerations which the Commission took into effect were well within its legal competence to make.</p>
<p>We submit that the legislative history is clear, it couldn't be clearer than that the Commission does have authority to consider conservation in its administration of the Natural Gas Act.</p>
<p>We submit at this Court itself, in the Hope case and in the East Ohio case, found no problem in reaching that identical conclusion, that is that the 1942 Amendment, by broadening the Act, gave the Commission authority to deal with this most important problem in the public interest.</p>
<p>We submit, therefore, Third Circuit's ruling is an error, that the Commission probably discharged its responsibilities under the Act, that the decision was within its legal of competence, and that its orders denying a certificate application to the pipeline company to transport its boiler fuel gas was correct and should be affirmed.</p>
<p>Thank you.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. LeBoeuf.</p>
<p>Argument of Randall J. Leboeuf, Jr.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: May it please the Court, I'd be very happy if I could meet the distinguished, Solicitor General to debate much of what he has said in the proper forum which would be the holds of Congress.</p>
<p>In our view, he has not answered the controlling issue, the issue which is disposed in this case at all, and that if that portion of his argument, which relates to end use or the reasonableness of the Commission in deciding a case on evidence, a no evidence report that on policy considerations outside the record, 100%.</p>
<p>I -- those matters are not reached at all until the primary question is met.</p>
<p>Did the Congress rest in the Commission the power to regulate in this subject matter that it did here?</p>
<p>That was the question that was decided by the Court of Appeals, that's the question we've raised.</p>
<p>We've stressed it in our brief.</p>
<p>We've pointed out the decisions of this Court, Hope, Panhandle, Indiana and so forth on which this Court has passed on that question in a number of different forums, he has not replied in his brief or in his argument.</p>
<p>Now, let's get right down to the facts.</p>
<p>Con Edison had a serious air pollution problem in New York City, in the vicinity of the United Nations at its Waterside plant which was an old plant, built 57 years ago, when it was an area of slums and slaughter houses.</p>
<p>Now, it is the most congested area of the world with great tall buildings, as well as the United Nations.</p>
<p>I've read this morning's papers, as to this being a makeweight argument where the commissioner of pollution, because of an inverted condition such as we're familiar with in Los Angeles, having occurred in New York, is asking industry to cut back on every possible use.</p>
<p>Asking people not to use cars, not to burn leaves.</p>
<p>This was no makeweight argument but as was suggested by Mr. Justice Harlan, that question is not reached with the Commission lacked the power to make the decision it did.</p>
<p>Our basic objection with the Commission's decision is that if denied the transportation certificate to Transco for no reason whatsoever, related to the transportation function, but for the sole reason, as the Solicitor General has stated when he gave you the four purposes, for this primary purpose, that it disapproved of the public policy and wisdom of Con Edison's going to Texas, making a direct non-jurisdictional purchase of this gas and, may I say, that when Con Edison made that direct purchase in Texas, there was no power of the Commission over that.</p>
<p>If he could've used the gas in Texas, as approximately half of all the natural gas produced in this country is used in the state production, there would be no Federal Power Commission question.</p>
<p>If Con Edison had built his own pipeline from Texas to New York, according to the decisions of this Commission, that Commission would have no jurisdiction.</p>
<p>The Montana Power Company built a line into Wyoming and made a direct purchase of gas for boiler fuel in transport and it submitted the matter nine years ago.</p>
<p>Think of the nine years in this argument that a great flood is going to be unloosed by this and the Commission held that it had no jurisdiction.</p>
<p>Now what happened --</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: What was the -- the facts were that the Montana Power Company built its own pipeline into the --</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: Into Wyoming, crossing state lines for its own use and consumption, not, of course, for resale, electric company alone.</p>
<p>And it submitted to the Commission and said, "Do we have -- do you have jurisdiction over this transaction?</p>
<p>If so grant this certificate, we think not, if so deny it on the ground of lack of jurisdiction.”</p>
<p>And the Commission denied it on that ground.</p>
<p>Now, here, a purchaser, a direct purchaser from the producer, may use his gas as he sees fit.</p>
<p>So that Edison was in the position, it had made a non-jurisdictional purchase, it could use the gas, and I disagree with the Solicitor General in his answer that if the gas were bottled and transported by a truck or a ship, that it would be the subject of regulation.</p>
<p>I call Your Honors' attention to the well-known fact that a large part of the household supply of gas in the United States is bottled gas that we have outside, and which has been clearly understood, not within the scope of the Natural Gas Act.</p>
<p>Now, after that was -- Edison was in the position that it bought its gas, it could use it, whether the air pollution of the United Nations is good or bad.</p>
<p>It could use it as it saw it fit.</p>
<p>It then went to Transco and it said, "Will you build, for our account, additional facilities and will you operate those facilities to bring our gas from Texas to New York City for our use?"</p>
<p>And let me say that the examiner, the Commission itself, found that there was no disadvantageous effect in that transportation service.</p>
<p>It was found that all of the standards prescribed in Section 7 of the Act had been matched.</p>
<p>It found that the standards, which since 1938, it had it evolved and applied in case after case for a transportation certificate, had been met.</p>
<p>That's what was called, the conventional ones.</p>
<p>It found that the charge which Transco made was compensatory to it.</p>
<p>It found there was no burden on any of the services rendered by Transco in making that transportation.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Con Edison have any interest in Transco?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: None, whatsoever.</p>
<p>Con Edison's interest in Transco is to get as much gas as it needs at the time when it needs it for, including the peak periods and at the lowest possible price.</p>
<p>And it -- No, as a matter of fact, it is quite contrary to what Solicitor General had suggested that this price was out of line, was out of line by a decision that Commission made years after of this matter had come up, not and at that time.</p>
<p>And actually in the case where that was up, the Commission itself referred to this charge by Texas producers for the direct sales to Edison.</p>
<p>I -- the majority thought it was a good precedent to use because it was honestly, the minority that had some questions.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: It -- it would be -- amount of the charge to be relevant Mr. LeBoeuf?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: No, it is not, sir.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Then it doesn't make any difference that it's all --</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: It is not.</p>
<p>We don't reach that question at all.</p>
<p>The Commission -- I think possibly the basic mistake that it made was that it thought it was dealing with a producer rate case that is a certificate for sale or for resale, such as you had in CATCO and other situations.</p>
<p>I think that perhaps led it astray.</p>
<p>Now, we had no other -- Edison had no other place to get this case, if it was to use it for this purpose of air pollution at Waterside.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: It -- because if you are right, am I wrong in taking if you're right in any arrangement that Con Edison made with Transco is irrelevant to the problem of regulation?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: I do not think I could go that far and I do not go that far, Mr. Justice Frankfurter.</p>
<p>I -- I say that when the Commission came to consider the transportation of this gas, it was entitled to consider the specific elements involved in that section and everything else that related to the public convenience and necessity of that transportation function.</p>
<p>Now, if -- carrying through the suggestion that was -- you were trying to clear up, this was an affiliated company.</p>
<p>And the pipeline was making two lower charge for the transportation service so that it was a burden on the customers of Transco to take gas for resale, then I think that was properly considered -- would be -- would've been properly considered by the Commission.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: It would be a burden in the sense of being discriminatory?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: Yes.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But not with the Wyoming case.</p>
<p>Was it Wyoming that you referred to me a minute ago?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: Not -- no.</p>
<p>The -- the Montana case.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Montana.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: I --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: If Montana built its own pipeline --</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: Well, there is no --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: -- it's none of the business of the Commission whether it did it extravagantly --</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: That's right.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: -- as a waste of money, so that it does make a difference if you have an intervening independent transportation line.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: I think it -- I think it does make a difference.</p>
<p>And real question which the Solicitor General has failed to deal with in his briefs or argument is whether the undoubted power to certificate the transportation by Transco, can be used as a device to regulate and prohibit because that's what it is, to prohibit the Edison purchase which is a matter not within its jurisdiction.</p>
<p>Now, I am being somewhat positive in my statement that the Commission and the Solicitor General, I believe, agrees with it, that the Commission made no of hypocritical claim that it was regulating -- denying this certificate for any transportation reason.</p>
<p>It found these benefits, these conventional standards had been met and in a recent case filed with the DC Circuit here, the Commission referring to X-20 decision, used these words that, “its action was an attempt to foil that transaction by denying the transportation certificate.”</p>
<p>And I could refer you to -- rather strange perhaps, but I suggest an uneasy conscience on the part of the Federal Power Commission but it's been prolific in case after case, which is decided subsequent with the X-20 to going back and trying to explain what it did decide in that case.</p>
<p>And one that is very interesting, I now refer to it by means of pointing out something that I don't think the Solicitor General has been informed about.</p>
<p>He said that these sales had been authorized and they have been last year.</p>
<p>The sales of natural gas in this nation were about 13 billion Mcf. of which 3 billion went to householders.</p>
<p>The other 10 billion went to industry, commercial, well drilling, all kinds of uses of that sort.</p>
<p>In this Midwestern case, there is a dispute among the commissioners as there was here.</p>
<p>The -- the vote here was 3 for the opinion 1 for the result, but for not going long with the reasons, in the third trial dissent.</p>
<p>In the Midwestern case, the evidence showed that the pipeline was proposing to sell gas to industry below its cost.</p>
<p>And certain of the commissioners, realizing that that would make the householder, the small user which is supposedly the cherished person, pay more than he should pay.</p>
<p>I objected.</p>
<p>Now, the majority in referring to X-20 decision, said that was -- their action was one of denying an application to permit the sale of natural gas for boiler fuel, not a word about transportation.</p>
<p>In another one, the Trunk Line, the interesting question there was whether the price that Edison had negotiated could be used in the Trunk Line case as a good precedent, because of its arms-like nature.</p>
<p>The majority said, referring to X-20, "The sales failed by reason of our denial of a transportation certificate.</p>
<p>The dissenting commissioner, Connole, a man of great ability said, "The certificate was denied in part, because the direct purchase of these volumes of gas would tend to raise the rates unduly."</p>
<p>Now, I should correct myself, it was Mr. -- Commissioner Klein in the Midwestern case who was objecting to the sale of the industry below cost and the effect on the householder that he used the words I quoted.</p>
<p>Now, I don't have the time and I don't suppose it's material to go into some of the basic facts.</p>
<p>Edison supplies 1,300,000 gas customers, mostly small ones of the nature of the Act is intended to protect 2,000,000 of electric customers and quite unusually, it supplies steam to about 2000 customers, but those customers or for example, Rockefeller Center, that vast complex of 15 large buildings, is one customer.</p>
<p>The heat largely from the steam manufactured at Waterside with the X-20 gas if that had been available, goes to that Rockefeller Center and those people in Rockefeller Center and other business offices and departments I suppose, are small people.</p>
<p>But, I mentioned that because the notion that Edison was selfishly trying to get this gas and that that the charge that -- the air pollution was not a true consideration, it was a makeweight.</p>
<p>Edison, from its own selfish economic interest, would not have an adverse effect on the gas it has to purchase from Transco and other pipelines for resale to the public, if it would have the effect that is suggested here.</p>
<p>I can't --</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Waterside is a --</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: Pardon.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Is Waterside an electricity generating station?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: It is an electricity and a steam generating station.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Selling the steam itself?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: It sells the steam itself.</p>
<p>It's a by -- it's a bleeder process by which the high pressure steam is used in the electric end and certain amount is bled off and by pipes run to all of midtown New York in order to prevent separate fuel installations in all these buildings.</p>
<p>And if you notice in the opinion of the Court of Appeals, they said they couldn't see any inferior use in distributing that steam from the central station, which is the whole electric art, or and in the gas run by pipes in running each householder and apartment building have its own apparatus.</p>
<p>I -- I -- there is so much been said about the record on this air pollution question that I'd just like -- or I get to the real legal question.</p>
<p>Just like to make one or two observations.</p>
<p>An unwary reader particularly at part -- point 3 in the Solicitor General's brief might think that the Commission was weighing evidence for and against this problem of air pollution.</p>
<p>There was no evidence in the record offered on the subject, except by the officers of the City of New York and by Con Edison's offices.</p>
<p>There was no evidence to weigh at all.</p>
<p>Now that bears and what I regard is the less question to be reached, the utterly arbitrary and unreasonable reckless character of the Commission's action.</p>
<p>Now, I do want to say one thing too further on pollution and then drop it.</p>
<p>There's a bitter attack it seems to me, an unwarranted attack on the testimony of Dr. Greenburg.</p>
<p>He was the Director of the Air Pollution of New York.</p>
<p>He's probably the most distinguished scientist in the world in this field.</p>
<p>He's a physician, an engineer, public health officer.</p>
<p>Dr. Greenburg is not the typical hired professional witness.</p>
<p>He came in not with pat-statements.</p>
<p>He came in with his heart in this thing and he talked with gravity, like a man making a plea.</p>
<p>He said, "I can't prove that this pollution, which is occurring in New York is the cause of the lung cancer, but I think there is a great reason to suspect it."</p>
<p>Now, the word suspect in there, the indefiniteness has been the subject of an attack.</p>
<p>Well naturally, he referred to, what was it, 4000 deaths that occurred a few years ago over in one week's time in London, because of air pollution.</p>
<p>Well there and again in the Donora, Pennsylvania, where I think there were 50 deaths, the mass autopsies was able to establish it to be sure that couldn't be established.</p>
<p>But what was established?</p>
<p>That this Waterside plant, each and everyday, pours out into the atmosphere 27,000 pounds of fly ash and soot.</p>
<p>And what the Solicitor General failed to mention, 42,000 pounds of toxic sulfur dioxide.</p>
<p>They -- in the attack on the indefiniteness, there is a testimony by Dr. Greenburg of the collecting station that are all over New York City.</p>
<p>And on the lured side, because you can't put the stations out in the East River, on the lured side, they make a great point as to wind direction.</p>
<p>It shows a pollution -- I mean, a deposit that is sought, which had been microscopically examined and connected with the soot coming out of these chimneys of Waterside, it -- of many times that occurring at any other place in the City.</p>
<p>Now, it seems to us that there are four decisions that bear on this question.</p>
<p>Briefly, our point is that Section 1 (b) of the Act is the jurisdictional section.</p>
<p>The other sections, I think, are fairly described as operational sections.</p>
<p>Once you have the jurisdiction established and one day grants jurisdiction over to transportation of natural gas or the sale for resale of natural gas or natural gas companies.</p>
<p>And then, as this Court had occasion to say in Panhandle, the Indiana Public Service Commission in 1947 that this legislation in 1 (b) is of unusual legislative precision, because then it goes on with a prohibition against regulation in any other field.</p>
<p>And this Court said and I'd like to read these two short sentences, "The omission in Section 1 (b) of any reference to other sales, that is direct sales for consumptive use in the affirmative declaration of coverage, was not advertent, it was deliberate."</p>
<p>Congress made sure its intent.</p>
<p>It could not be mistaken by adding the explicit provision that the Act shall not apply to any other sale, direct sales for consumptive use of whatever sort, were excluded.</p>
<p>I am reading from the decision in the Panhandle, the Indiana Public Service Commission, 332 U.S. 507.</p>
<p>I -- it's set forth in our brief at -- I think it's about page 40 -- no, it isn't.</p>
<p>It's – it's referred to at pages 18, 26 and 29.</p>
<p>I think the first time we had rather full quotes.</p>
<p>Then another case that we rely on, that Solicitor General has mentioned, is the Hope case.</p>
<p>Hope was a rate case.</p>
<p>It was under operative Sections 4 and 5 of the Natural Gas Act relating to rates.</p>
<p>The State of West Virginia having large interest in natural gas, coal, and oil intervened.</p>
<p>It sought to -- it objected to the rate schedule the Federal Power Commission had prescribed, and it objected because it wanted a high rate for industry in order to promote the conservation of its resources.</p>
<p>Now, the majority writing to Mr. Justice Douglas held specifically that the operative rate sections could not be perverted to invade a jurisdiction which Congress had withheld from the Federal Power Commission.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: I haven't looked back at this recently, but didn't we reserve the problem under Section 1?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: What -- what you did, Mr. Justice Douglas, is just this --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: I know, we refused to allow the --</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: You -- you referred --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: -- consideration of rate in the present rate structure.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: You referred -- that's right.</p>
<p>You -- you said that the -- that the rate section meant the rate fixing in a normal sense, and to try end use it for a conservation purpose of controlling end use, was not a proper construction of the statute.</p>
<p>That you'd have to -- that have to go to Congress to get the support for that, but then you did say whether it's dictum or not.</p>
<p>You did say that under the transportation or certificate Section 7, that conservation might be considered.</p>
<p>Now, you referred to the 1942 Amendment and -- I see, I have five minutes.</p>
<p>I -- I think I'd better refer to that, that 1942 Amendment had three objectives.</p>
<p>One was to give the Commission power to pass on the certification of all expansion of pipeline not just in the competitive areas it's had been.</p>
<p>Two, it was to give the Commission power to consider in granting the certificate, initial breaks.</p>
<p>In other words, your decision recently in CATCO, which we do not have any quarrel with, that's a sale for resale, where you have said that under those circumstances initial rates could be prescribed, is soundly founded on the legislative history of the 1942 Amendment.</p>
<p>Now, the third thing was that the Commission might consider the interest of the producers or carriers of competing fuels.</p>
<p>Now, in that sense, of course that was a conservation element and therefore, I think the -- if I read Mr. Justice Douglas' wording in Hope, in referring to that, that he was referring to that element of conservation, then I -- whether it's dictum or not, I think it's entirely correct, entirely supported by the history and I think that's the way it should be read.</p>
<p>Now, I -- time does not permit, there was another fourth case -- another Panhandle one in 1951, where the question is whether Michigan could regulate these direct sales and this Court upheld the power of Michigan and said that the Federal Power Commission had no such power.</p>
<p>And the last case, which is really very close in point and solves any question that may in the Hope case, again it was the Panhandle case in 337 U.S., where the certain gas leases had been included in the pipeline certificate as reserves.</p>
<p>The Company then tried to sell the gas leases.</p>
<p>The Commission tried to block or foil that sale and this Court held, it had no such power.</p>
<p>And in that connection, this Court stated specifically that their certificate provision Section 7 could not be used as an indirect means to violate or invade an area which Section 1 (b) had prohibited.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Is your -- the core of your argument that the Commission and without power to withhold a certificate under Section 7 to be granted in the public interest, in the public interest not being particularized, it can't withhold that certificate because the purchased gas, which it is carrying, was being carried for a purchaser, whose purchase is not subject to regulation.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: I -- I think I can answer Your Honors question --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Isn't that -- isn't that --</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: Yes.</p>
<p>That -- that's it.</p>
<p>I -- I think I can answer even more narrowly.</p>
<p>The -- you cannot construe an operative section, like 7, to violate the expressed prohibition governing the jurisdiction in Section 1 (b) and that's what this case is.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Was the -- was the purchase contract conditioned upon a grant of a certificate?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: The purchase contract could not become effective unless we could get gas from Texas to New York.</p>
<p>I haven't --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: In other words --</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: I haven't read the reporting of it for some years and I can't be more specific than that.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: In other words, it isn't -- you simplify the situation by saying that Con Edison could go down to the field and buy gas and then dispose of it as it treated down there and --</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: That's right.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: -- without buy or lease?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: That's right, except for conservation regulation of the sale, of course.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Yes, but I'm -- but the point is that that isn't what this is.</p>
<p>This is the purpose in the field which requires the enjoinment from the transportation.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: I say that all there is in this case, the Con Edison made an exempt purchase and he could use that gas for any purpose it wanted.</p>
<p>It turned to Transco, instead of building its own pipeline under the Montana case doctrine, to build extra facilities, nothing to interfere with anybody else, and I say that the Commission, in denying that certificate for reasons having no relation whatsoever to the transportation function, was attempting to exert a jurisdiction which Congress had deliberately, as this Court has held at least four occasions, deliberately withheld from it in the scope of its jurisdiction.</p>
<p>And I say that the argument with respect to the interpretation that the Solicitor General has advanced, disregards to the fact that in each and every year in the last decade, this Commission has gone in different words to the Congress and asked for the power that it tried to exert here and Congress maybe because of the pendency of an attempt to draw a national fuels policy, maybe for other reasons, Congress denied it, because Senator Magnuson, at his request in the year 1959, they put in a bill, which would give this Commission the power to do the -- to control the uses as to whether they were in the public interest.</p>
<p>And Congress --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: You're saying -- you're saying the statute implied that -- what it gets down to is that the statute impliedly prohibits an out of town, a long distance purchases in the -- in the field unless it uses it in the field or has a pipeline of its own or carry it away in bucket.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: I say that the statute expressly prohibits regulation in that area.</p>
<p>And I say that the action of the Commission was intended in violation of antitrust laws which are not defended here at all.</p>
<p>It was intended and deliberately and they so state to give a monopoly to the pipelines and never to allow, any and the Solicitor General in the opening sentence of his reply brief, argues that no out of state purchaser should come to a production state and buy gas.</p>
<p>It would strike down the Montana doctrine as well, of course.</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: Mr. LeBoeuf the law, as it can be, while permitting opinion isolation, doesn't allow the opinion isolation to be hooked up with something else, which produces a different situation.</p>
<p>That's the essence of what you decided yesterday in totally different situation.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: Let me answer that and I don't want to transgress on my friend's time, the counsel for Transco.</p>
<p>I say that they may consider Commission in issuing a certificate, may consider, look at non jurisdictional factors.</p>
<p>Take the very simple thing, all gas producers are -- oil producers and vice versa.</p>
<p>Now, one of the great headaches that the Federal Power Commission caused in the tremendous delay in its functioning under the Gas Act is trying to fix rates where they have to allocate cost between gas and oil.</p>
<p>Now, I say that it's perfectly proper for the Federal Power Commission to consider oil cost in order to effectively regulate the gas cost.</p>
<p>That's proper, it's a non-jurisdictional fact, but it's properly considered.</p>
<p>But I do not say because of that, that the Commission may direct that oil company to do something which is regulating the oil business which hasn't been vested, and that is exactly what the X-20 case is about.</p>
<p>They don't -- they're not interested in the transportation.</p>
<p>It's a device to fraud.</p>
<p>They're trying solely to block the sale to use their own words.</p>
<p>We attempted to foil the sale of the Texas producers, Con Edison.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Are you acquainted with the Houston Texas case, Houston Texas Gas & Oil case?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: Oh yes, I am very well.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: I can -- how is that distinguishable from -- there I gather that the Commission authorized what it refused to authorize here.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: It has in every case, where our – and there's a foundation that I haven't time to get into, of gross discrimination in this case.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: What do you mean to say, in every case?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: I -- I say this.</p>
<p>The new -- our briefs cites the case and it can be checked for accuracy.</p>
<p>I believe that in every case where the issue of a sale for boiler fuel or industrial use was up, the Commission granted the certificate, approved it, and the cases like the Texas case and the Florida case, we call it, that went up, the Court sustained the Commission's power to order or permit the sale.</p>
<p>Now, there were four cases where it denied that power.</p>
<p>Three of them it's subsequently granted in some degree and the fourth one, never went up or never went to any court.</p>
<p>And --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: When you say every case, then you're talking about the three cases that went to the court?</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: I'm -- I'm saying that every case that I know of before the Commission --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Oh.</p>
<!-- Randall_J_Leboeuf_Jr--><p><b>Mr. Randall J. Leboeuf, Jr.</b>: They have granted permission for boiler fuel, except those four cases, three of which were modified.</p>
<p>And in the Florida case, the transportation of natural gas for boiler fuel use of the two electric utilities in Florida, was volumes many, many times here involved.</p>
<p>This is only 50,000 Mcf. out of 10 billion that are being used in 1959 for several purposes.</p>
<p>Thank you Your Honor.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Connor.</p>
<p>Argument of Richard J. Connor</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Mr. Chief Justice.</p>
<p>I think we have to reemphasize chiefly in connection with Justice Frankfurter's question that insofar as the transportation element of this X-20 arrangement was concerned, that every single regulable item, connected with that transportation, was specifically gone into.</p>
<p>The Commission would have authority to determine whether or not, we had gas to back it up.</p>
<p>They made the determination that we had the gas.</p>
<p>They would have to inquire as to whether we had a market which would support that transportation.</p>
<p>They found that we had a firm demand and market for the gas.</p>
<p>They then would have to determine whether our facilities were physically adequate to do the job.</p>
<p>They made the determination that the facilities were adequate.</p>
<p>They then had to make a determination whether the whole project was economically feasible.</p>
<p>They made the determination that it was feasible.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Which project was that?</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: I beg your pardon.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: You said, the project, you mean the transportation project?</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Yes, the transportation project.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Your facility, exactly.</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: That is correct.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: (Inaudible)</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: These are our facilities.</p>
<p>That is correct.</p>
<p>And then the rate was fully compensatory.</p>
<p>They had one minor tiny little exception with respect to an insignificant little rate aspect which the government concedes is not a part of this case.</p>
<p>They found that as Commissioner Hussey in his dissent noted, that's also a fact, now taken issue with the majority, that the X-20 service would make available additional volumes of gas for peaking loads.</p>
<p>That's the 60-day gas which has been explained and re-explained here.</p>
<p>And then, it was specifically found by the examiner, and this is important, that there will be no adverse effect on Transcontinental's other customers or Transcontinental's other regulated business.</p>
<p>And then as it has been indicated here, while I feel that at the point I just suggested, the inquiry on this particular record was at an end and the Transco should have been granted its certificate, we went further in what might be surplusage and put on this very extensive testimony in which was done on the great benefits that would accrue to the City of New York by the suppression of air pollution.</p>
<p>Now the Commission acknowledge that we did all of these things, but they said, there are certain policy considerations, which militate against the grant of this certificate.</p>
<p>Now let me give you a brief history as far as the record is concerned in respect to these policy considerations.</p>
<p>During the course of this trial, before the examiner, there was only a single issue raised, which ultimately became one of the five policy considerations.</p>
<p>And that issue was the displacement of coal or what is then loosely called, end use.</p>
<p>Now we knew that that would be an issue because Mr. McGrath, representing the coal people had been permitted to intervene and that issue was cross-examined by Mr. McGrath extensively.</p>
<p>The only evidence, as Mr. LeBoeuf has told you, that was put into this record, was put into the record by Transcontinental, Consolidated Edison and the City of New York.</p>
<p>No other evidence was put into this record by anybody.</p>
<p>At no time during the course of the trial of this proceeding, was any issue even suggested, vaguely intimated, or hinted, other than the so-called issue of displacement of coal or end use.</p>
<p>None of these, all the four policy considerations that I will come to shortly, were tried on the record, suggested, or even remotely intimated in the course of the record.</p>
<p>The record was closed.</p>
<p>Some three weeks later, the Commission staff brief to the examiner was filed.</p>
<p>And then for the first time, there was recited four or five -- five arguments against the grant of certificate, four of them were completely novel.</p>
<p>One of them, of course, was end use or boiler fuel use.</p>
<p>And you will note in the Commission's opinion that after reciting what the staff and the coal people argued, they list them first, second, third, fourth, and boiler fuel use, the Commission devotes the next two pages to merely paraphrasing those contentions of counsel, which made up the brand new four policy considerations, adopts them as their own, and then they say, that taking these four policy considerations, in conjunction with end use, they served to tip the balance against the denial of the certificate.</p>
<p>Now in the -- against the grant of the certificate, I beg your pardon.</p>
<!-- unk--><p><b> Unknown Speaker</b>: (Inaudible)</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Without going specifically to the record, it's in the order denying rehearing.</p>
<p>And they state specifically that end use -- they are not treating as determinative of this case.</p>
<p>And contrary to the impression that is brought back directly here would seem that this whole case turned upon end use.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Turned upon what?</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Turned upon what has been called end use of the gas.</p>
<p>I'll now proceed to take up each of the so-called denial factors.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Did the dissenting commissioner write an opinion, I don't – I can't find it.</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Yes, he did.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Where is that?</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: 215 in the volume --</p>
<!-- unk--><p><b> Unknown Speaker</b>: In this volume.</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: It's in -- in the --</p>
<!-- unk--><p><b> Unknown Speaker</b>: Volume -- Volume 2, is (Voice Overlap) over the place.</p>
<p>Page 260.</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Now the first of these novel policy considerations was that if the Commission granted this request, they would be confronted with many requests of the same general character and granting the X-20 proposal, they would have no fear or rational basis for denying similar such requests.</p>
<p>Now, we assume that the Commission is talking about -- I will assume first, they're talking about a case very closely analogous to this, where large quantities of gas are being bought in the suppression of air pollution.</p>
<p>I submit in that connection, if Your Honor please, that, yes, there are other cities, probably the worst affected city, is the City of Los Angeles.</p>
<p>I presume that it would be fair to say that New York is probably a very close second.</p>
<p>And we may have similar air pollution conditions in some of the other cities.</p>
<p>But I submit in that regard that if they were submitted to the Commission, applications for the use of gas for the suppression of an air pollution condition, such as exists in New York, then it would be arbitrary and capricious not to grant the use of gas for those purposes.</p>
<p>On the other hand, if the Court -- if the Commission, for chances, enlarging its thinking to include the typical industrial customer.</p>
<p>And I'm sure that in the opposition briefs, when they speak of this great insatiable mark, it's going like a gigantic sponge down to soak up all the available gas in Texas so that not a single thousand cubic feet will be left for the resale market, they can only be talking about the broad general, what I call, typical industrial market.</p>
<p>Now the typical industrial market buys gas for one purpose, not for the purpose of suppressing air pollution, but for the single purpose of saving dollars and cents.</p>
<p>Very frequently, these big industrial plants will have two or three valves, an oil valve, a coal valve, and a gas valve, and they will buy the fuel that is the cheapest and that's the sole criterion for the purchase.</p>
<p>Now, let's pause for a moment and see how colossal this market is or is going to be in the light of the constantly rising prices of gas in the field.</p>
<p>In the very Midwestern case, talked about by Mr. LeBoeuf, Midwestern could only be certificated, because the competition from other fuels was so terrific.</p>
<p>It could only be certificated, providing it sold the gas that it purchased from its parent Tennessee at a lesser price than it actually paid to its parent.</p>
<p>And Commissioner Klein, in that case, dissented and took the position that he felt the end result there was one, where the domestic and the small commercial consumer was, in effect, subsidizing the industrial sales.</p>
<p>Well known to the Commission, here is Northern Natural Gas Company.</p>
<p>Some two or three years ago, actually lost the sale of a boiler fuel load to the Council Bluffs Power Plant, right across the river, from its own offices for gas laid down in Council Bluffs, not purchased in Texas, but laid down in Council Bluffs at 22 cents.</p>
<p>Now, to bring the picture closer to Hope as a demonstration of the lack of this insatiable typical industrial market, here's Transcontinental, it had one large industrial customer for boiler fuel, that was the Duke Power Company in the Carolinas.</p>
<p>Ten years ago, we were authorized to sell them a substantial block of gas.</p>
<p>They were interested in the gas because at that time it was cheaper than coal.</p>
<p>And then five years ago, that project was renewed.</p>
<p>It's running out this December.</p>
<p>Duke Power no longer wants any gas from Transcontinental.</p>
<p>Why?</p>
<p>The price is too high.</p>
<p>They can buy coal cheaper.</p>
<p>They're taking a little tiny amount of gas from us, for what they call fuel ignition purposes, but the blocks of boiler fuel gas are no longer wanted because of the competitive price of coal.</p>
<p>And that situation is becoming more and more acute and more and more nationwide so this vast insatiable market spoken up in my friend's briefs, I think is in the land the imaginary.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Well, if you were selling gas, I mean you, I mean the Transcontinental selling gas to -- distributing gas or bringing gas to New York for sale in the retail market, you could consummate this transaction, I gather.</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: If we ourselves were --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Or if you were selling to a distributing company that was selling to retailers as well as to Con Edison that would be alright, I suppose --</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Yes.</p>
<p>I am coming to that point a little later, if Your Honor --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: In your own time then.</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: -- please.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Don't let me interrupt you.</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Now next policy consideration was the policy consideration number three to wit, the impact of large demand or relatively limited supply is certain enough to raise rates and prices in the fields, if only one bidder is bringing that demand there.</p>
<p>Now how much more serious is that impact when as the form of multiple bidders, each attempting to reserve to itself a firm supply.</p>
<p>Inevitably, there would be upward pressure on the rate levels in the fields.</p>
<p>We do not believe we ought to encourage such when it's unnecessary.</p>
<p>Now what, in effect, is the Commission saying?</p>
<p>That because Con Edison goes down and buys non-jurisdictional gas that that has a tendency to raise the prices which go through the fully resale regulated channel that the Commission can regulate.</p>
<p>But the plain fact is that price pressure in the field is dependent upon the totality of the demand.</p>
<p>In other words, it, Transcontinental itself, had gone down and purchased this gas and then sold it to Consolidated Edison, the end result, as far as price pressure is concerned, would have been absolutely identical.</p>
<p>But as I will point out so long --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: That is -- it was said somewhere earlier in your argument that if -- that if the Commission upheld here, Consolidated Edison would find it impossible to get this boiler gas, but actually couldn't they do it just by the method you've just suggested in the -- in the conventional way of buying from the department.</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Oh, yes.</p>
<p>We -- we could buy -- we could buy the gas.</p>
<p>We could buy gas and sell it to Consolidated Edison.</p>
<p>However we'd again be met with the problem that we seem to be run into – run into here, we don't know whether the Commission would let us sell that chunk of gas to Con Edison for boiler fuels despite the fact that it was selling best amounts of sort of combination gas or regular CD gas, a large part of which goes under their boilers.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Yes.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Isn't there another problem that it is raised by the question just put by Justice Stewart?</p>
<p>If the only reason from withholding the certificate was that there was a sale -- a sale or no resale purchase, then it might be argued that the denial of the certificate means they're going to use the certificating power in order to prevent -- to prevent what otherwise are non-regulatable sale, non-sale research.</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: That is precisely the point, Your Honor.</p>
<p>And I think that the real basic thrust of the Commission's position, one of the veneers stripped from the other three or four denial factors, is that here, the Commission was very, very reluctant to see any sale made by a producer, which was not subject to the Commission's regulation.</p>
<p>That I think that the whole thrust of the opinion points very strongly in that direction.</p>
<p>I even would venture the notion that since they take the view that end use is not determinative, that had we gone -- we Transcontinental bought the gas and then resold it to Con Ed, we probably wouldn't be here today.</p>
<p>Certificate – Commission might well have certificated that.</p>
<p>But it's been mentioned by Mr. LeBoeuf, this particular gas, Transcontinental didn't dare to buy, and why, because it would have triggered Transcontinental's favored nations contracts to the extent that our gas cost would have gone up -- the cost of our other gas would have gone up by $15,000,000.</p>
<p>And that's one basic reason why Transcontinental was virtually shut out of this field and shut out from making this purchase.</p>
<p>Now, when the Commission talks about the effect that this purchase being to raise the price in the jurisdictional channel, shall I say, I think there's a pretty fair answer to that.</p>
<p>That Congress has given the Commission machinery to regulate those prices in the jurisdictional, purely jurisdictional channel, and irrespective of what the influences are that moved those prices up, the Commission has Section 4 of the Act, Section 5 of the Act, and Section 7, in respect to initial prices.</p>
<p>And they have adequate machinery of control for those prices.</p>
<p>I will get to cut some portions of my discussion of each of these policy considerations, because I'd like to spend a moment on the so-called 1942 Amendment.</p>
<p>The impression is given throughout the briefs that the 1942 Amendment of the Gas Act, in some fashion, gave the Commission authority over the conservation of gas.</p>
<p>As the lower court said that -- as they read this Commission's opinion, the Commission was attempting herein to exercise that general conservation authority over the totality of the gas research.</p>
<p>Now what briefly was the situation?</p>
<p>In the original 1938 Act, the Commission had an extremely straitjacketed, geographical jurisdiction.</p>
<p>They could only certificate another -- a pipeline going into the territory or market already served.</p>
<p>And as Commissioner Manley (ph) points out in his testimony, there were tremendous number of difficulties involved with the administration of that.</p>
<p>One, the question, what was that market?</p>
<p>Was it merely a market served that the actual towns it was served, was it a geographical area, what was it?</p>
<p>He spells out in detail what difficulties we had trying to administer that section.</p>
<p>So that the basic fundamental broad purpose of the 1942 Amendment was to release that straitjacket and give the Commission authority nationwide, and that was its one and total purpose.</p>
<p>And in the course of his testimony, it was indicated that because of the restricted nature of prior certificate authority, the coal people had not been granted full participation so that Commissioner Manley pointed out that a secondary effect of this Act would be to permit the coal people to be treated as interveners in Section 7 certificates.</p>
<p>For what purpose?</p>
<p>For the purpose of them showing the economic effect upon them and that is made specific in the Manley testimony.</p>
<p>Now the implication is that there were recitals in the Hope case and a recital in the East Ohio case that seemed to make reference to the fact that the 1942 Amendment gave the Commission conservation powers.</p>
<p>I happen to have here a copy of the report and I would enjoy having my friends, I have two copies, pointing out anywhere in that report where there is any reference or suggestion of a conservation power.</p>
<p>I don't happen to have Commissioner Manley's testimony here, but I have reviewed it and I think that by no stretch interference, can it possibly be said that there was a single word in that 1942 testimony of his in respected conservation.</p>
<p>And there was a real reason for it.</p>
<p>When this matter was being drafted in Federal Power Commission, Commissioner Manley had one strong objective.</p>
<p>He wanted to get that legislation through rapidly, and in that interest, we brought into the meetings of the Federal Power Commission, the coal people, the railroad people, the representatives of the pipelines, and the NARUC.</p>
<p>For what purpose?</p>
<p>To get every last difficulty straightened out so that this amendment would move through the Commission rapidly or through the Congress rapidly and to have put in any suggestion that we were -- wanted a power over conservation, would have opened the Pandora's Box and that legislation might still be pending.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Mr. Connor, but the provision as to the large undefined phrase that is required by the present or future public convenience and necessity, that phrase isn't restricted to the explicit jurisdiction or power of the Commission, that includes other consideration, doesn't it?</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Yes, but -- Mr. Justice Frankfurter, it does.</p>
<p>But as you pointed out and I'm sure, it was your decision in the Edison case when you drew a distinction between the broad type of statute like the Interstate Commerce Act and the National racial -- relations -- Labor Relations Act and I think the Federal Communications Act.</p>
<p>And you said when Congress wants to give broad sweeping powers, it uses broad vague language.</p>
<p>And the broader the language and the vaguer, the more is the power to the administrative agency to fill in.</p>
<p>And -- but you then went on the point the distinction in the case of the more restricted statute, such as the Fair Labor Standards Act with which we were dealing.</p>
<p>And I think you must remember that -- and you particularly pointed out the denials of authority that were given to the Fair Labor Standards Administrator and indicated that those were restrictions on the concept of – or the breadth of the powers.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: And your restrictions – can you find the restriction to be in Section 1, in the three categories of regulatable situations.</p>
<p>Is that it?</p>
<p>In 1 (b)?</p>
<!-- Richard_J_Connor--><p><b>Mr. Richard J. Connor</b>: Yes, I find -- I find them there.</p>
<p>And in respect to this notion of the Commission that they could give to the pipeline companies, the net result of the Commission's decision is that there is only one group of people that come down into the fields and buy gas, pipelines.</p>
<p>Distributing companies are out, whether they're buying it for direct sales such as this one or whether they're buying it for resale.</p>
<p>The import of the Commission's decision is that they don't want them down there because they raise prices.</p>
<p>I say that they're answered thrust implications or at least the spirit of the antitrust acts are being violated when the Commission restricted them to a limited group of pipelines, when as a matter of fact, the Federal Trade Commission in its report, which is also recited, have that as one of the reasons why they put Section 20 in the Act.</p>
<p>So I think that each section of the Act must be read as a limitation on the concept of public convenience and necessity as it's contained in the given statute and here particularly you have 1 (b) which says that they cannot regulate a direct sale.</p>
<p>I think that's definitely to be read into the concept of public convenience and necessity.</p>
<p>Thank you, gentlemen.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Solicitor General.</p>
<p>Rebuttal of James Lee Rankin</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Mr. Chief Justice and may it please the Court.</p>
<p>I'd like to deal briefly with the inquiry of Mr. Justice Douglas about the Houston case, which is also called --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: May I indicate the thing that's back in my mind.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Yes.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: I don't know this industry well enough to know what percentage of the total natural gas is produced and sold to industrial users today, but it must be a very substantial percentage, isn't it?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Yes, Mr. Justice Douglas.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: So the policy of the Commission is not to prohibit the sale of gas to industrial consumers.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That is true, Mr. Justice Douglas.</p>
<p>But there has to be --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: But they had done it in another way they could do, Con Edison could do what it's doing here, it bought through an intermediary company.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Well the policy is there must be some special reason to justify because it is an inferior use.</p>
<p>Now in the Houston case, which is called the Florida case because it was to get gas to Florida --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: But is it -- is it the question of the inferior users, or is it the question of doing it, provided that you do it through a company that is regulated?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: No.</p>
<p>That was a direct purchase in the Florida situation, in the Houston case.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: I know.</p>
<p>That's -- that's something like this thing.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That's exactly the same.</p>
<p>And the reason that they permit it with the dissent by Commissioners Connole and Klein at that time was that was the only -- the showing was it was the only way that they could make the pipeline to Florida so that natural gas would be available to people in Florida, economic.</p>
<p>The proof was that was the only way they could get it there, and it was, for that reason and that reason alone, that the Commission proved it.</p>
<p>Now --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Now, is -- is the --</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Yes, sir.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Is the objection -- the objection, the cited objection, that this is a purchase for an inferior use -- this is a transaction which leads to an inferior use?</p>
<p>Is that at the heart of the business?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That is --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: There are -- there are priorities and anything -- that the consumer purchase is the main aim of the statute you say.</p>
<p>And anything that derogates from that is an inferior use.</p>
<p>Is that it?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Well it's a combination.</p>
<p>It's clearly recognized that this is an inferior use as far as --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: What do you mean by inferior use?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That the superior use is a use by consumers for house heating, domestic use of heating water and cooking.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Is that the -- do you consider that one of the important bases for the Commission's holding in?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That is part of it, because the Federal Trade Commission, in its report, which was this Court has referred to as the reason for the Natural Gas Act, in which is recited in preamble or the first part of the Act, as being the reason, as said in so many words that boiler use was an inferior use.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: But -- but inferior and superior are not synonymous with allowable and non-allowable.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That's right and --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: In Con Edison, that the officers of Con Edison, were about to go to prison for polluting the air and that was no other way to prevent it except this and you'd say the Commission would be authorized to – you would be here justifying the Commission's grant of a certificate of this kind.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: I think that the Commission would take that into consideration under public convenience and necessity properly, and it would be one of the factors waived with all the rest of them here to determine.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Well did the Commission find that the inferior use, the claim of, what is called the end use, air pollution was a (Inaudible) if they find that that was just a screen and a pretense.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Well they find other way, but they didn't.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: They found it and didn't justify it.</p>
<p>So that -- but they didn't weigh it.</p>
<p>They took it into account and found that it would not support the award of the certificate.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: All I'm suggesting is the inferior and superior were not written into the statute.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Yes, sir.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: It's not written into it.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That's right.</p>
<p>I recognize that.</p>
<p>But on the other hand, conservation is a consideration that this Court has recognized and the Commission has and it's tried to weigh these things.</p>
<p>Now, what the basic issue in this case is that they claimed, they would have a right to buy this gas in Texas and flare it, just let it go out in the air and burn it or just let it go in New York.</p>
<p>And the Commission has no power, except to say whether they'll permit it to be transported regardless of that use.</p>
<p>And the basic issue of the Government -- the Federal Power Commission is that pubic convenience and necessity is such that and has always been conceded to include the various considerations that would make up that and they can deny the transportation even though the purchase is valid and the use would be valid but they don't have to permit transportation that is not in the public convenience and necessity for that kind of use.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Isn't it a fact though that the fact that the purchase was not regulable was an important consideration in denying the certificate?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: The fact that -- no, the fact that the effect of the purchase on the whole industry was such that it would damage the interest of the consumer was what was the denial of the case.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But all none -- but all non principle cases, non-resalable sale has some effect on the industry.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That's right.</p>
<p>But they don't all have this damaging effect.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Well, this specific case or that the general attitude of looking a sketch at large non-regulable purchases in the field that the Commission was ruled by.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: I think it was be the effect in this particular case plus the fact that this is demonstrated by the record to be something that Transco has held out.</p>
<p>They said to every purchaser they had, but they finally changed what we couldn't hold it out to little purchasers, they couldn't do it.</p>
<p>But they held it out to everyone in their big purchasers if you -- if Con Edison gets it, then the rest of you get the same thing.</p>
<p>And that would destroy the whole gas industry that was to protect the little consumers throughout this country.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Well nobody -- well there's no pollution problem, never mind whether it's valid in this case or not.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Yes, sir.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Where there's no pollution problem, the pollution blame can't be made.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Well but they used, as I pointed out, case after case here, where they're trying to use it in regard to their burrs, they're using it -- they want to use it in regard to their compressors.</p>
<p>They want to take it all the way around to California through Mexico, to have it not regulated by the Federal Power Commission.</p>
<p>Millions and millions of thousand cubic feet of gas, they're all shown here that these various considerations so that I don't see how the Federal Power Commission could disregard these other potential cases right before their eyes.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Suppose they made a general rule that no large scale industrial purchasers in the field for non-resale will be allowed.</p>
<p>They couldn't regulate that.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: No, I don't -- I don't claim to have any such power.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But they could say, we'll give no certificate to, what did they call it, carrier to transport that which you legally bought, they could do that?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: I think so, because I think that they have to apply the public convenience and necessity and if they don't find that affirmatively required, they do not grant it, and here, the fact that this would be damaging to the whole industry and the protection of the consumer and also this business of conservation is not any mere bug of the lure or something that's threatened.</p>
<p>When you think of how the gas passed the reserves that this country have gone down, as far as the estimate is concerned, so that they're talking now in terms of 20 some years in exhaustion, rather than 30 some years.</p>
<p>It's a real consideration, and the Commission says that it has the power to consider all of those elements.</p>
<p>Now, this wasn't a new proposition.</p>
<p>There were 20 years of regulation under the term, public convenience and necessity, prior to the Natural Gas Act and under the ICC and, of course, this Court's recognized that that was the source of that term.</p>
<p>And when you took public convenience and necessity in case after case, in regard to the ICC, you didn't say, why if there can be -- if you can find the consideration that weather or not, this line has got the money and has got the route and whether or not, there's somewhat else competing with it, that those are the only things you can look at about public convenience and necessity.</p>
<p>This Court has said you can look at the whole thing, the whole fabric, to see what it does for the people of this country in the area that's applied for.</p>
<p>And in that, you take all of these considerations to protect the top, the real purpose of the Act which is to protect consumers.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: I don't -- you may recall, I do not recall any comparable institute in the field of -- under the Interstate Commerce Act whereby, the certificating power was used in order to prevent an otherwise congressionally authorize power to block an otherwise specifically authorized congressional, non-regulatable power, I mean, purchase not for resale.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Of course, I don't --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: I don't think, they're wrong, all I am saying is the situation.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: I don't concede that's the case here.</p>
<p>I say --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Yes, because they -- they said, the purchase by Con Edison is non-resalable, isn't it?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Well, nobody's complaining about it.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Well I know.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: They can buy as much as they wanted.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: What I'm saying is what you're arguing here is that the convenience and necessity power of the Commission can be utilized in order not to reference to itself, but primarily and predominantly isn't just made so clear.</p>
<p>They cleared that moments ago, predominantly, to prevent an exercise of power, which Congress has authorized people to exercise.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: No, Mr. Justice Frankfurter, I think this is different, because I think this particular facility, when you certificate a carrier, you're talking about a capacity of the pipeline, and pipelines don't have indefinite or unlimited capacity.</p>
<p>They are dependent upon their capital power, their power to borrow the money, and the extent of their ability to build such pipelines.</p>
<p>And they can only build so much with any capital structure.</p>
<p>So that you're talking about, shall this portion of the pipeline be used, preempted, dedicated anywhere you want to use for it, for the purpose of this kind.</p>
<p>Is it in the public convenience and necessity interest?</p>
<p>And I think that's where -- that's the test.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But I'm accepting your argument that this would be adverse to the natural gas industry, but that which is adverse specifically allowed by Congress namely, to purchase not for resale.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: And I concede that the purchase is allowed and they can purchase and nobody is saying they can't.</p>
<p>But I say there is no place that Congress said that if it isn't in the public convenience and necessity, they have a right to transport.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: They can purchase but they -- they have the legal right to purchase, but they can't make that right effective.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Well they can make it effective for many things but they can't make effective, as far as being transported, because Congress said that has to be subject to the public convenience and necessity.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Your time's up but I'd like to ask just one question.</p>
<p>In regulating sale or resale, issuing certificates of convenience and necessity, has the Commission heretofore taken into consideration the elements that it has taken into consideration here in determining the certificate necessity for transportation?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Yes, in regard to the end use, it has in the number of cases.</p>
<p>There are some --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: What I mean particularly is that it said, some instances that you're going to use to boiler for industry and not enough for homes?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Yes.</p>
<p>They have in this way, they have said where they applied for gas for boiler use, you can have that gas for boiler use, you can have it for starting the boiler or for the preliminary heating up.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: What was the basis for that?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: They took the position that they had a right to control the conservation aspects of end use.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: You mean the end use?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That's right.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: So as to a certain extent of bring about an apportionment for certain use for it.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Well, they were trying --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: That's what I gather, you're arguing here --</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: That's right.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: -- by domestic use of another.</p>
<p>Has that been utilized in our exercise of the Commission's power generally, by it does have power regularly.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: I'm advised that it has and as far as we've set out in the brief in detail, the cases and I think they show that they have tried to exercise it in that manner.</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: Can you set out in next (Inaudible) that have been approved?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Well I can answer that Mr. Justice Clark in this way that boiler fuel user contracts have been set out.</p>
<p>We don't -- I don't know of any just like X-20.</p>
<p>This is a peculiar animal, not the way it's come up.</p>
<p>But the comparable boiler use cases have been set out.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: For direct purchase?</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: Yes -- No, the only direct purchase that I know of --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: The Florida case.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: -- would be the Florida case.</p>
<p>The others are I think, more of the other kind.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: Purchase of the pipeline.</p>
<!-- James_Lee_Rankin--><p><b>Mr. James Lee Rankin</b>: But there maybe some direct purchases too.</p>
<p>They're all -- we tried to deal with all.</p>
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No </div>
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Tue, 25 Sep 2012 22:35:30 +000082933 at http://www.oyez.orgUnited Gas Co. v. Memphis Gas Di - Oral Argument, Part 1http://www.oyez.org/cases/1950-1959/1958/1958_23/argument-1
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Case:&nbsp;</div>
<a href="/cases/1950-1959/1958/1958_23">United Gas Co. v. Memphis Gas Di</a> </div>
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Transcript:&nbsp;</div>
<p>Argument of Rankin</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Number 23, United Gas Pipeline Company, Petitioner, versus Memphis Light Gas & Water Division, et cetera, Number 25, Federal Power Commissioner, Petitioner versus Memphis Light Gas & Water Division, et al and Number 26, Texas Gas Transmission Corporation, Southern Natural Gas Company, Petitioners, versus Memphis Light Gas and so forth.</p>
<p>Mr. Solicitor General.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Mr. Chief Justice, may it please the Court.</p>
<p>The issue in this case is whether under the decision of this Court in Mobile, a natural gas company may file schedules changing its rates unless it has a specific agreement in regard to the amount of those rates although it has reserved the right in its agreement to file such schedules under the statute subject to the Commission's approval.</p>
<p>The United Gas Company pipeline filed such schedules on September 30th, 1955, materially increasing the rates, changing the rates that it had under a contract.</p>
<p>The Commission found that it had the power to file such schedule to change rates by reason of the terms of its contract and the reservations that it had made under that contract for that power and rejected the Motions of the respondents to reject such filed rates which motions were on the ground that Mobile prohibited the filing of such rates unless there was an expressed agreement to the specific level of the rates.</p>
<p>The Court of Appeals reversed this action of the Commission I might say first, was taken after the rates were filed and suspended after the 30-day period, all of the rates, except those that were only industrial.</p>
<p>The rest of them were suspended in accordance with Section 4 (e) for the five months period and then they were subject to refund under that statute.</p>
<p>The Court of Appeals held that there was no right to file even though they accepted the construction for the purposes of this case of the Commission of a contract between the parties and that the reservation did provide for such filing.</p>
<p>The Court held that unless there was an agreement to the specific rate that was filed, that Mobile prohibited the filing and therefore, reversed the decision of the Commission.</p>
<p>Now, the agreement that is involved is set out on page 7 of our brief and it is crucial to this controversy.</p>
<p>We think that in light of the Commission's action and the Court of Appeals' acceptance for the purposes of this case of that construction or finding by the Commission that this Court should accept that it's supported by substantial evidence in the case.</p>
<p>And therefore, the agreement should be found like the Court -- as the Commission found it and that filing should be accepted by this Court.</p>
<p>But the language and the question of the defect of a language is raised as one other points by the respondents and we therefore would like to call to your attention partially.</p>
<p>The language that is of particular importance in this question is the fourth line “or any effective superseding rate schedules on file with the Federal Power of Commission.”</p>
<p>It's a question of what effective superseding rate schedules where any on file with the Federal Power of Commission mean.</p>
<p>The United contends that that means not only the rate schedules that were filed on a particular day of this agreement, but any that would be filed superseding or taking their place under the provisions of the Act, Section 4 (d) and that that where the Respondents said that they will pay which is in the first line, for the gas delivered shall be paid for by the buyer under the seller's rate schedules and such superseding schedule.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Apart from, excuse me, apart from the reference to the rate schedule, was there any specific price referred to in the contract?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: The contract was a part of the tariff-service agreement rate schedules that the Commission developed.</p>
<p>It started back in 1940, but later largely after 1945 -- 1948 and the Order 144 that it promulgated at that time.</p>
<p>And the concept of that program of rate schedule was to have the rates set out in a tariff schedule and then in the service agreement that was made with all of the contracting customer, they would refer to that rate schedule, but the rates could not be set up as such in the service agreement with the idea that if they put them in the service agreement, there would be a tendency to make individual rates in every case.</p>
<p>And the purpose of Order 144 and that system of rate program was to try to have the rates effective as to areas and not as to individuals customers and the purpose behind that was to get away from the discrimination and preferences that had been discovered throughout the various industry hearings that the Commission had dealt with.</p>
<p>And they thought by having the rates in the separate tariff and the changes in the rates in separate tariffs, then the Service agreement would be made with the customers and refer to those rates would not have a separate individual rate for every separate customer and each customer would not have to look to every other service agreements to see whether someone else in similar situation had a better deal than he did so he could raise the question of preference.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Were those services being (Inaudible) which just means as I remember the time in the Mobile case --</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: And my question is, was there -- as there was in the Mobile contract, a special rate as distinguished from the rate that was prescribed in the ordinary tariffs that were en banc.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: No, the Mobile contract was distinctly different.</p>
<p>And there were some 18 contracts of that type that were filed with the Commission and those had a specific rate and no provision in the service agreement or the contract for any change whatsoever.</p>
<p>Now, this contract started out before 1948 with a -- an agreement between the parties for service and it also had detailed escalation provisions which are known in the trade as provisions for price increases based upon this difference in tax rates that are assessed or cost of living or anything of that type.</p>
<p>And they were specific in contemplating flexible rate structures that will be adjusted from time to time as changes in cost developed.</p>
<p>Now, in order to get away from some of these problems, the preference and discrimination and these escalation provisions -- the escalation provisions that they developed in the industry and the difficulty the Commission had to determine what the rate structures were and how the discriminations occurred and who they affected, the Commission decided to try to develop this tariff-and-service agreement program and they tried started out in 1940 with it the war and interrupted it and it was until 1948 that they could really develop and put it into effect.</p>
<p>But for example, here is a group of contracts and there were six files of this type that for United alone, the gas pipeline involved in this case.</p>
<p>Now, in order to try to find out if you're a rate expert, what your particular customer might be involved in with regard to whether some customer in the same group of area and type of the same rate in fact would be entitled to and so that you would find out whether the discrimination of preference against to your customer.</p>
<p>And you would have to go through all of these and try to find out, compare all these contracts and if that involve not only the rate itself but the time of delivery and the place of delivery and different differentials that would be involved in negotiation and the amount of gas that was furnished.</p>
<p>Then you'd also have to look at the supplements which for certain rates and provisions of that type, were replaced and would have to go through all of that kind of procedures in order to find out what the situation was that you've raised.</p>
<p>Now, it was so bad that with the -- the Panhandle Eastern, they developed gas shortage and it was a question of how they were going to supply all of these customers and what their relationship should be to eliminate the discrimination and preferential treatment that would be involved if they didn't treat them on a fair basis.</p>
<p>So, the Commission had that problem to determine how to handle prior to 1948 when they involved this tariff-and-service agreement system.</p>
<p>And in trying to deal with that, they found many, many preferences within discriminations that had developed, that had not come to light before that at all, but as soon as the shortage developed, then the customers all came and said, “Well, how this happened that my situation is like this other one and that was comparable?”</p>
<p>And they had to go through the whole system and reallocate to eliminate the preferences and discriminations that had developed.</p>
<p>And there were -- there was another case, a similar kind where they discovered it only after 5 (a) hearing the discriminations and preferences that occurred.</p>
<p>Now, under this tariff-and-service agreement system, we have a file like this that the customer or a rate expert can look at.</p>
<p>And he can determine and see what the schedule is in one place above the tariff provides for the rates and then there is -- at the back, a listing of every customer and what rate it is sold out and then there's a type of service agreement that is set out in the tariff's schedule.</p>
<p>That is the only service agreement that the pipeline can use to sell his gas unless he gets special permission on a regulation from the Commission and can show a reason why the service agreement should be different for this particular sale.</p>
<p>And you can see what difference that make the way the expert turn at the back, he can see what other customers that are comparable sold out, he can turn to this tariff schedule and he can turn it to the service agreement and he can find out exactly what his customer is getting, what he should get in order to be fairly treated along with other comparable cases.</p>
<p>Now, that is basic to the problem in this case.</p>
<p>First, however, I'd like to turn to the -- what Mobile held.</p>
<p>As we understand Mobile, it did not at all that there had to be any agreement to a specific rate in order to file under 4 (d) or 4 (e).</p>
<p>What we believe Mobile held was just this, that it did not set aside contracts and if you had a contract that provided that your rate was -- I think it was ten-seven-tenth cents the file in cubic feet in that case, and you have no provision for a change of that rate and you had it for 10-year period that the Act did not say you had any right to change it.</p>
<p>That's entirely and solely what that case held.</p>
<p>The case also held that you could have ex parte rates and that if you -- as we read it, if you had any provision for changes, you go back to the contract law separate apart from the Act and if under contracts, you have a right to make a change, you still have that under the Act.</p>
<p>The Act did not add anything to it except the right of review in order that the Commission could protect the public interest under 4 (d) and 4 (e).</p>
<p>One further thing we read in to the act is that of 4 (d) and 4 (e), the test of what is lawful is the same as under 5 (a) in that -- that the same structure and they have to be read together.</p>
<p>Commission so interprets it and so applies it.</p>
<p>It's also a question of -- there are some question raised in the case as to whether there's a different rule applied and whether there's an advantage to the consumer if you forced the examination of the rate under 5 (a).</p>
<p>Now, you recall that 4 (d) and 4 (e) is an entirely different structure.</p>
<p>It provides for jurisdiction in the sense of rate fixing and the rates can be filed, the schedule of rates under 4 (d) and 4 (e), there has to be a notice as this Court said in Mobile and then the Commission can consider during that period of time after the filing of notice whether or not with the showing that's made, the rate should be suspended or should be allowed to go into effect and they go in to effect at the end of 30 days if the Commission does not act.</p>
<p>And they go in to effect that this Court said in Mobile because of the contract between the parties or because the gas company files a rate and they do not going to affect because of the Act itself.</p>
<p>Then after that happens, the Commission may suspend the rates and set a hearing and that's what it did in this case.</p>
<p>And during that hearing, under its regulations, it requires that the burden fall upon the -- the person who files the rates to prove that they -- the proposed rates are not unjust, unreasonable, unduly discriminatory or unduly preferential and that's the test.</p>
<p>And in effect, the Commission always applies that test to determine whether or not it's -- the rates are lawful, applies them back against the structure of rates before and determines whether or not under that test, they are the lowest rates that will make a fair return plus the cost of doing business.</p>
<p>And it is construed as a pin point as distinguished from a general area of rates that might be fixed.</p>
<p>Well, that's what we think that Mobile means.</p>
<p>Now, the experience of the industry was that except in rare cases like Mobile made such contracts that I just referred to, the industry recognized there had to be some flexibility to rates.</p>
<p>By the nature of the industry, there had to be some type of long-term contracts because the investments were very great in these long pipelines over the country and it required large engagement of capital.</p>
<p>It also required some permanency to the relationships with the distributors because they involved themselves in substantial investments to provide this service.</p>
<p>So in light of that, contemplation of long-term agreements between the parties, there had to be -- it was recognized there had to be some provision for flexibility in rates to take care of the different costs and different levels of cost of doing businesses, cost of all kinds of materials and labor changed from time to time.</p>
<p>There also had to be some kind of a provision that would encourage capital to invest in this industry and provide the necessary funds for expansion as the country grew and needed the development of additional pipeline carrying capacity in order to take care of the distributor's needs for the various suburban developments that have been characteristic of this country from before the war period -- before it interrupted in ever since to very rapid manner.</p>
<p>Now, there have been substantial rate increases asked by these companies.</p>
<p>In every case, the Commission has suspended the rates and set them for a hearing in order to look at the consumer interest and seeing if the rate was proper and lawful under the test.</p>
<p>But I'm here to say that, I think this Court under its decisions in the past and in this case, must be interested as they access first in the consumer.</p>
<p>That the consumer also has the interest in the ability of these companies to perform their contracts and to meet the demands of this country in its growth and if they cannot continue to receive the capital and attract capital that is needed for the growth by getting a fair return, then the country is hurt, the consumer is hurt and that is part of this picture that we must look at in considering this case.</p>
<p>The most important element of this case to the Commission is the effect that it has upon the structure that it has created of these separate tariff and separate service agreement structure of rates.</p>
<p>I'll tell you why that is.</p>
<p>No agency of Government has enough money to do all the jobs that's given to it by Congress and time after time, this Court has seen that it has the ability to only do so much of that job.</p>
<p>So that, whatever funds it has, if it's going to regulate properly and in the interest of the country, it has to use to the greatest advantage.</p>
<p>And any system of rate structure that is as much as possible self-enforced and self-regulatory that it puts up sign posts and warning signs to the customers and the public generally of what -- of whether discriminations which are prohibited by this Act, undue discriminations and undue preferences, any place that you can have those sort of the customer can come along and say, “Here, how did this happen?</p>
<p>They can't do that to me.”</p>
<p>Instead of the Commission have to dig it up through a labyrinth of papers and before we had a situation where there were some 8,000 pages of these contracts as against some 388 pages, that's the kind of a situation that this tariff-and-service agreements program of rate structure developed as contrasted with the old contract system.</p>
<p>Now, it's argued by the respondents, well, this whole situation can be taken cared of.</p>
<p>You can still file under 4 (d) and have it heard under 4 (e) if you get an agreement and you ought to be able to get an agreement on the rate from everybody.</p>
<p>There shouldn't be too much trouble about that, but I have tried to carefully examine this and I don't believe that's true.</p>
<p>I don't think that you can get the agreement unless the parties are in rather considerable parity as to their bargaining positions.</p>
<p>Now, you must keep in mind under 4 (d) and 4 (e), the rates are suspended.</p>
<p>There is a refund provision except as to industrial and I will cover that in a moment, but otherwise, those rates are paid all during the interim.</p>
<p>Under 5 (a), if the rate is established there, it's only prospective.</p>
<p>It can't cover the back period.</p>
<p>Now, you take the distributor who doesn't want to expand his operation, is satisfied with the -- with the gas that he is getting, there is every interest in the world for him to not agree to anything.</p>
<p>Because he's says, it's their contention, you go under 5 (a) at that point, you can't file under 4 (d) and if it takes 2 years, 3 years, 18 months, whatever you can chase it down to and it's been as much as six years to have a 5 (a) hearing.</p>
<p>Let's say you can get them cut down further 18 months, during that 18-month period, while the cost of doing business is going up with the gas pipeline and all the cost of labor and living and materials and so forth, the Commission can't do a thing about it.</p>
<p>It can only make a rate that starts from the day that that hearing into it fixes it.</p>
<p>It can't even go back to the dates where they started the hearing and fixed the rate.</p>
<p>So, you would never get an agreement with the distributing company and that's the kind of situation unless you wanted to extend this operation.</p>
<p>Now, you can trade out in that kind of a case.</p>
<p>Possibly, the fact that you got additional gas and wants to have another development, you could take care of and other factors of that kind if you can find it, but in every case, you couldn't even find those.</p>
<p>In some cases, the distribution company would be a better trader than others then what will you have?</p>
<p>You will have the to follow that has no reason to trade out if you make some agreement of any kind or very little and finally does and you file under 4 (d) and 4 (e), you will have the one that has reason and he makes a different rate and you will have all kinds of rates involved all over the place.</p>
<p>And then you will have to go under a 4 (e) hearing to try to straighten out all those preferences and discriminations that have been built by this old contract method of arriving at rates.</p>
<p>And it is -- will be very destructive of trying to protect the consumer interest and trying to have this picture uniform.</p>
<p>Not that everybody pays the same rate, but everybody that's in the same area or group where there isn't a good reason for him to pay a different rate gets the same rate.</p>
<p>And it does help the Commission by the people in the industry working at it to get rid of this discrimination better than any other idea that has been now developed.</p>
<p>Now, there is another -- in regard to industrial rates, I would like to cover that matter.</p>
<p>The statute does not provide for the suspension of industrial rates as such if the rate is set as to industry, there is no provision for suspension.</p>
<p>If it covers both industry and other rates, then, the Commission has always taking position that it is a suspendable rate and the greatest portion of the gas that's subject to the jurisdiction of the Commission is sole suspendable, not non-suspendable rates.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Do you mean the tariff includes both?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Yes.</p>
<p>But, there is no provision for suspending those that are called industrial only.</p>
<p>Now, that is an important factor, but it isn't anything like it just appears to be claimed in response brief and I think they must misconceived it in the way they have urged it because --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Would you mind stating again the incidence of exclusively industrial rates where they're not suspendable in the whole network of the industry rate of prices.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Any industry --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Not -- not the law but the practicality.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: The practicalities of it are that there are several --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: In -- in quantity --</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Yes.</p>
<p>There are seven companies engaged in only industrial rates.</p>
<p>They amount at the present time to approximately 2%, I think a little less than 2% of the whole jurisdictional structure of rates.</p>
<p>So that approximately 98% of the rates are suspendable jurisdictional rates and only 2% are these that are non-suspendable.</p>
<p>Now, I'll tell you another thing about those.</p>
<p>Why does anybody buy that kind of a rate?</p>
<p>The Commission has urged for years almost since the Act was passed in 1938 that they changed this to make those rates suspendable and if the League of Municipalities and some of the industries would come forward and help, I'm certain they'd get a change, but there's a good reason why at least the industries don't.</p>
<p>You take the Pacific Northwest that's referred by -- to -- by response in their brief and you will find that there was a rate of two cents per -- per term and it was proposed to increase that rate to two-and-a-half cents per term for these various industries.</p>
<p>The suspendable rate was, as I recall three cents and it was proposed to increase it to three-and-eight-tenths.</p>
<p>Now, the toll in the industry that had bought the two or that was going to increase to two-and-a-half, could pay during the non-suspension period at the increased rate and be way ahead of paying the suspendable rate and that's apparently true throughout the industry.</p>
<p>Now I don't want to represent this always through because I haven't searched the whole picture as to whether it all fits that way, but it looks like it -- that is the picture and I can readily understand why anybody that's buying gas on that kind of a basis doesn't come in and urge --- that be suspendable because what he is doing, it's just like when you buy insurance or any other commodity, you're buying a different commodity and you're getting a better rate because you don't have the suspendible provision.</p>
<p>He takes the risk of whether or not it's going to get a price increase and -- in many and most cases he would have opportunity to take the suspendible provision at the same time.</p>
<p>And he chooses deliberately and purposely to make the other type of contract because he'd better off and he's got a cheaper cost for his gas even though it's not suspendible during that period.</p>
<p>Now throughout this growth of this industry and it has been rapid, it has been recognized that there has to be a flexible rate.</p>
<p>There has to be some provision or changes and modifications of the rate structure as the pipelines and distribution systems and other gas services people developed and have greater needs in the community, and also to take care of the costs of doing business and practically without exception, they always provide it for this escalation clause as I have described it.</p>
<p>Now, the Commission determined when it developed in 1948, this rate structure, the tariff-and-service agreement, they wanted to get away from these escalations provisions and a part of that was that there would be -- there was a recognition in the industry that with those clauses, generally, the customer could not come in and resist or object to the proposed rates at the hearing because he'd already agreed to him.</p>
<p>He got -- the provision in the contract.</p>
<p>So, the Commission was going to eliminate them entirely in 144 proceeding and United objected to that, and said that they thought that would be a change in their substantive rights.</p>
<p>And, the Commission said, it was not trying to change substantive rights in that proceeding which is a regulation proceeding.</p>
<p>It wasn't a place for -- it should be changed in substantive rights and they provided that there could be a reservation of the right under certain conditions to change the rate and make a filing under the provisions of Section 4 (d) and by that, they also, by the Order number 144, they generally eliminated the escalation, but they expressly provided for this provision that they couldn't revive their rates and it would be subject to Commission review.</p>
<p>Now, the Commission when it reviews these rates, is not arbitrator or deciding a controversy between the pipeline and its distribution company as private parties.</p>
<p>It's deciding what in the public interest is a lawful rate and it was applied the statute for that purpose.</p>
<p>So, it isn't in any way acting in the ordinary sense of trying to determine what the best rate is for these two companies to pay each other.</p>
<p>Of course this Court has said that mustn't the primary interest of the statute termed by Congress is to keep in mind the consumer that he is the primary interest.</p>
<p>And so, in passing in 4 (e) or 5 (a), as I've told you the Commission applied exactly the same principles and standards.</p>
<p>It has to determine as a regulatory body for this in the public interest as a lowest reasonable rate as lawful that can be applied and, that's his function and that's what it does.</p>
<p>So that -- and one other thing I would like to cover and I want to reserve some of my time and that is, in regard to the independent producers.</p>
<p>Suggestion is made that the Commission is not acting as, maybe it should or in the best faith, in regard to the independent producers.</p>
<p>Now, I want to tell the Court upon careful inquiry to the Commission that I have been advised, they are acting under the Philips' case, there is no question may be accepted and followed.</p>
<p>They're following the City of Detroit to do it and they're trying as rapidly as they can to meet the problem of the regulation of independent producers.</p>
<p>There isn't any question as this Court -- Court well recognized in the Philips' decision that there's got to be regulation of that level in order to protect the consumer interests, otherwise we just keep on spiraling up in that point, but the problem has been great.</p>
<p>They have over 11,000 balances of independent producers that they have suspended.</p>
<p>They're trying to work them through as fast as they can.</p>
<p>They have increased their force 50%.</p>
<p>They've gotten approval from the budget to do that.</p>
<p>Why don't they increase it more?</p>
<p>It's impossible because, it takes lawyers, great experts and engineers and people of that kind who have some knowledge to help them with their work and they recruit them as fast as they can.</p>
<p>Now they hope that at least by 1961 and they're working at it as fast as they can, they'll have that out of the way and they looked forward to the system like this of the tariff-and-service agreement structure of regulation in that area as soon as they can get on top of the situation that way, so that it will help to regulate itself in the same manner.</p>
<p>I would like to reserve the rest of my time.</p>
<p>Argument of Ralph M. Carson</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: Mr. Chief Justice --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Carson.</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: -- may it please the Court.</p>
<p>On behalf of petitioner Natural Gas and Pipeline; United Gas Pipeline Company, Petitioner in number 23, I would like to speak in subordination to the solicitor General presentation because his client of the Federal Power Commission is very much in control of the Interstate operations of this petitioner as all other pipelines and Interstate suppliers of Natural Gas for resale, but at the same time I would like to devote myself if I may upon his shoulders because in this petition and our request for reversal of the Court below, we speak for a commercial interest with great importance, not only to ourselves as we can see, but to the gas consuming public and the industries who would use this pipe or fuel.</p>
<p>United Gas Pipeline itself, one of the larger transporters of natural gas interstate, it has 24,000 miles of transmission; it sells gas and other line.</p>
<p>It sells gas at wholesale only and the single fact of this case and agreements of all consumers represented by briefs file before the Court, it has had to pay and on is increasing prices for natural gas since the early forties, none an unusual thing.</p>
<p>A fuel is so valuable as characterized by Justice Jackson in the Hope case, which has been adapted now to so much residential and so much industrial consumer use of all kinds by the Interstate pipeline that have --- the country through miracles of technical adaptation.</p>
<p>If not wonderful that this limited supply despite explorations, constant and expensive exploration has resulted in the constant bidding of the price of gas and field, so that in the relatively static -- when in -- as against the relatively static stage of the industry, say in the early 1940s just after the enactment of the Natural Gas Act, a field competitive price with 3 or 4 cents per thousand cubic feet.</p>
<p>Today it's running up to 24 and 25 cents per thousand cubic feet.</p>
<p>And that's simply because people want it and because there's no way of controlling finally the price of a valuable commodity in short supply.</p>
<p>Now, through pipelines of this petitioner, their flow annualized over last year the incredible volume of 1,250,000,000,000 cubic feet of natural gas and other pipelines are as large and many are almost as large, so that the cost of constantly replacing this wasting asset, in exploration is a (Inaudible) and hence, rate increases.</p>
<p>We make no apology for the fact, and that the proceeding out of which the present motion to dismiss and reject filings arose was an application for rate increase.</p>
<p>It has been succeeded by other necessary applications for which I'll speak in a minute.</p>
<p>If I mention to the Court that 1 cent addition for thousand cubic feet for the price of gas means $10 million a year approximately additional cost of service and that 90% of the costs of service are represented in these filings that I will exhibit to the Court is the cost of gas.</p>
<p>You will see why that must necessarily be so.</p>
<p>Now, our case here as I say -- said rests upon the Solicitor General's case, and the tariff and filed service agreement formula that the Commission has, I think it's fair to say, imposed upon the industry.</p>
<p>I think that imposition was no doubt a wise one.</p>
<p>It has facilitated the understanding of the gas charges simplified and made uniform the tariffs, rates and classifications.</p>
<p>But it is a form in which the parties, the parties here, and other pipelines, and natural gas companies whose pricing methods may be affected by Your Honors' decision, it is a practice which has been imposed by Order 144 as of the year 1948.</p>
<p>Your Honors, bear in mind that the Natural Gas Act dates from 1938, you will note that for 10 years, the Commission administered its regulation by requiring the filing of all contractor's rate schedules.</p>
<p>And the Mobile contract which you had before you in 350 United States was one of those originally filed contracts filed and approved as of 1946.</p>
<p>And as intimated in a question from the bench, it was a special contract in that it was a fixed price contract for 10 years filed as a pertinent to a resale contract, also fixed price, to the Ideal Cement Company dependent upon the sale contract and it had no provision for price change of any kind or character.</p>
<p>Now, the decision of this Court in that case concerning which have we have no quarrel whatever here, as we think most inappropriately had been used, or distillations from it I think used, to invalidate a 20-year contract in this tariff-and-service-and-agreement form that I'll enlarge upon in a moment, with language not found in the Mobile case at all.</p>
<p>True, as was intimated, there was in the record and before the Commission, in the Mobile case, a regular service agreement which around 1955 or 1956 has been executed by Mobile, but that was not in question in that case.</p>
<p>The motion to reject, which Your Honors' sustained, was insofar as the increase affected the fixed price contract.</p>
<p>Now, the decision of the Court which is carefully limited to the facts has been by the court below, I think to the great injury of the industry and the public, enlarged to apply to this contract which provides in a service agreement where payment under a designated rate schedule, “or any effective superseding rate schedules on file with the Federal Power Commission.”</p>
<p>Those words or any effective superseding rate schedules have been completely ignored in the construction by the Court, although given their true value by the Commission on the facts to indicate a promise to pay the effective rates from time to time on part, that was the finding of the Commission based on all the evidence, but we are confronted with an application through a misconstruction of Your Honors' decision, which deletes those words from the contract.</p>
<p>Now, may I spend a little more time on the contract because, while the issue here affects at least nine pipeline companies with identical language for change, and the great many others were somewhat similar language, there are special facts in the situation at the United Gas Pipeline Company which are laid hold off by the respondents to argue that those words don't mean what we say.</p>
<p>United Gas Pipeline Company, as the Solicitor General intimated, resisted the new tariff arrangement set forth in Order 144.</p>
<p>It felt that that tariff arrangement, service agreement arrangement, which required the restatement of all contracts, deprived it of substantive contract rights.</p>
<p>Litigation resulted which was tendered to this Court, which resulted in some amendment of the tariff provision and Order 140 -- part 154 of the regulations thus promulgated to permit existing contracts to be restated.</p>
<p>To preserve their special clauses pending their life provided that the filing companies thereafter operated in the tariff-and-service agreement form.</p>
<p>That was done, but the result was that the United Gas Pipeline came late to this system.</p>
<p>So Your Honors will find the first filing which it may the so-called “conversion tariff” appeared in July 1952, and this filing for an increase out of which this motion arises in September 1955 and since then, it's adverted into in my -- brief of my friend's opposite there had been other filings which they label, “unilateral increases.”</p>
<p>It's a ratable most in a year because the price of gas has gone up and we are limited in our filings for rate increases strictly by these regulations to a showing -- a cost showing, building up a rate-base from which a fixed rate of return will yield revenue, distributed on a cost of service allocation to the different rate zone.</p>
<p>Now, here is a picture.</p>
<p>Here is in fact a file of September 1955.</p>
<p>It proceeds by setting forth the new rate schedules and those to purchasers, Your Honors will find in the record.</p>
<p>Then it gives an index, it gives an explanation of the series of the new rates.</p>
<p>It gives three (Inaudible), including a flowchart, and then it gives in great detail as demanded for the regulations that I call your attention, calculations of cost of plant, cost of gas, requirements of an -- return to investors, comparative earnings price ratios, and so on and so on with meticulous detail.</p>
<p>Now, Your Honors, this filing is not a mere dropping at in the Office of the Commissioner or mailing a letter to the Commission as some of our adversaries might incur.</p>
<p>If the Commission staff on examining this finds it does not comply with the form exacted by the regulation, this is rejected out of hand and we're given time to -- to repair the deficiency, the deficiency letter technique is used.</p>
<p>And this filing is not only posted in the Office of the Commission, but it's mailed to all the important large volume purchasers and selected schedules are mailed to all the distributors that purchase from us so that they can comment with knowledge during the Commission's inquiry on -- on filing on the suspended -- in the suspension period.</p>
<p>Now, what are the rate schedules to which this filing and subsequent filings are in amendment as permitted by the statue, and the contract?</p>
<p>They appear in general structure at the beginning of the record, Your Honor.</p>
<p>Those are 1952 rate schedules and I'm informed that they have now been superseded in many respects.</p>
<p>You will note after the first 20 pages, a series of pages called General Terms and Conditions, and then you will find in the general form and in the General Terms and Conditions provisions as to the service agreement on page 44.</p>
<p>And in the tariff separately you will find on page 47 a form of service agreement.</p>
<p>Those are all at their inception cut in combination a complete original tariff and which includes as you will note the form of service agreement or contract between the forms.</p>
<p>Now, to illustrate how those rates of charges which the Solicitor General explained as being uniform and published to the world, articulated with the contract for purchase.</p>
<p>May I ask Your Honors to look at one of the more recent contracts at page 305 of the record which is open to a class.</p>
<p>This rate schedule, at the bottom of the page, is available to any natural gas pipeline company hereinafter called bio and on page 306 you will find the rate for natural gas service as a demand charge and a commodity charge.</p>
<p>I won't take the time to illustrate the different types of rates, but the Commission currently controls the classification of those rates.</p>
<p>And then the rate on page 3 in this generally filed schedule dated 1954 is articulated with a service agreement at page 94 which happens to be that of Southern Natural Gas Company also a petitioner and the service agreement you will note provides the scope of the agreement, delivery point and pressure, volumetric obligations, other matters of negotiations between the parties as to the type of service and on page 970 under Article 4, you will find the article price.</p>
<p>All gas delivered shall be paid for by a buyer on the seller's rate schedule or any effective superseding rate schedules on file with the Federal Power Commission.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Mr. Carson, what inference (Inaudible) draw (Inaudible)</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: That -- what inference do I wish you to draw from what, sir?</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: From your recital for the last two minutes from the --</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: That these forms are prescribed by regulatory authority, exercised under statutory power and that the service agreement is intended to refer so they continue the service agreement in its price clause it refers to the continually changing series of rate schedules.</p>
<p>And -- and so intended by all parties as testified below.</p>
<p>In other words, I direct Your Honor's attention to the peculiar form of this to show that despite the impact of the regulation, it is essentially contractual.</p>
<p>And I avail myself of the extensive treatment of the liberty of the contract of the gas companies in Your Honor's opinion in the Mobile case and particularly, I address myself with the language at page 342 where the Court said that in the Mobile contract, there was no power to change if the purported change is one that the natural gas company has the power to make.</p>
<p>The change is completed upon compliance with the notice requirement and so on.</p>
<p>I say that -- that the parties understood that the filing of a new schedule under -- in connection with the service agreement, especially calling attention to effective superseding rate schedules, embraces just the type of change to which this Court especially left the way open in the Mobile case.</p>
<p>And I contrast that which to me the completely unintended and unintelligible insistence of our adversaries that this Court decided in the Mobile case, there could not be a new rate until the buyer had specifically agreed to the price.</p>
<p>Now, I'm digressing because I let on to Your Honor's inquiry, but in connection with what -- this was -- the Solicitor General said about a rate investigation under Section 5.</p>
<p>May I mention to Your Honors that without any criticism or whatever of the Federal Power Commission by reason of the smallest of its staff, the investigation under G1428 began on October 1948, lasted 10 years and finished last year and the contention of our adversaries is that during that period, our cost study which was necessary, we could not recover the price of gas.</p>
<p>We would be out of business if that was so.</p>
<p>I know that's quite impractical, let me address myself to the other angle.</p>
<p>What would be the sense in asking all the customers of United Gas Pipeline Company to agree to a particular rate change?</p>
<p>Can we ask them to read these two volumes?</p>
<p>Well Your Honors, have an amicus brief offered before you in which the City of Harrisburg says, “It's an imposition on us to make us read those volumes.</p>
<p>We can't understand them.</p>
<p>How can the four pipeline purchasers, the four pipeline transportation customers, the six cities in Alabama, the five cities in Florida, the 14 cities in Louisiana, the 13 cities in Mississippi, the seven cities in Texas, our company's distributors buying directly from us and the 59 cities in Texas buying from the United Gas Corporation gas that we sell with, how can they negotiate new contracts with us in any kind of unison in any reasonable period of time?”</p>
<p>As Mr. General as well said, you can only expect coming to the consensual agreement if there will be an inequality of power.</p>
<p>If for example, the new distributor needs or the consumer needs more gas, I'm told that the contracts affecting the 59 towns in Texas served by United Gas Corporation are in effect although not in terms of requirements contracts.</p>
<p>They can't need more gas in an effective way.</p>
<p>And to deal with each of them would have to deal with each of their city councils, and to deal with each of the communities and purchasers in the other States would have to deal with their State Commissions.</p>
<p>We'll never be through and when we got through, we'll be bound to be the very disparities, the alleged discriminations, the inequalities, the variations of rate zones, the departures from allocated costs which would bring us as Mr. Rankin said, into a Section 4 (e) proceeding to rectify discrimination.</p>
<p>Wholly useless and most injurious alternative and one from which I think we're clearly entitled to be rescued by the terms of our contract.</p>
<p>Now I'd like in the remaining time of my initial presentation to refer to the terms of the contract in connection with the legal -- with the legal analysis and characterization of those terms.</p>
<p>I have referred to Your Honors in our brief and I will not take time now, the controlling process of the regulations which appears in our Appendix, the White Appendix at pages 8 (a) and following, and the portions that I particularly mentioned in connection with the rate increase filing that I've showed to the Court would appear at page 20 (a) and the following in 15463, materials submitted with changes in the tariff.</p>
<p>At page 21 (a), if the proposed change in tariff or rate schedule will result in a major increase in rates or charges, there shall be submitted Statement A to M inclusive described hereafter.</p>
<p>And then omitting other detail, I direct Your Honors' attention to statements A to M beginning at the foot of page 24 (a) beginning with overall cost of service, rate base and return, cost of plant and so on in utmost detail as to which we have no hearing nor complaint.</p>
<p>It's an incident in regulation and running down through statement M.</p>
<p>Now, as I understand, if a filing of this character by inadvertence skips or mishandles anyone of those details is rejected out of hand.</p>
<p>We haven't made a filing yet or initiated a change in rate.</p>
<p>The surveillance is most -- is most exacting.</p>
<p>So, that the intimations in the briefs opposing, this covers industrial waste too, the information in briefs opposing that the rate changing procedure under Section 4 is just the means jacking up rates by writing letters and as soon as one increases refuse to write another letter is quite superficial and oblivious of the true facts.</p>
<p>Now, as this amply disclosed in our briefs, I might add before passing on, there's been information that these regulations may not be binding and the companies perhaps ought not to abide by it.</p>
<p>That affects us because we did our best to protect ourselves against them in 1948 in the litigation I spoke of that's mentioned on our briefs.</p>
<p>Now, we consider they are an entirely valid exercise statutory authority and we're persuaded that the discriminations eliminated had been wisely eliminated by the type of regulation that is now enforced.</p>
<p>But, I call on Your Honors' attention that one of the amicus briefs said that the Mobile case has held it widely, these regulations are invalid.</p>
<p>Hence, that we're contracting in a wholly invalid form which has been imposed upon us for the last 10 years.</p>
<p>And that counsel for one of the respondents in arguing to the Commission below said the same thing at page 1767 of the oral argument which is part of the record or on that printed record.</p>
<p>He said, “Now, it is our strong contention that Section 154, there are parts of it that are not valid under the Mobile decision.</p>
<p>As everybody knows, the Commission was under the impression that the law was different at the time these regulations were put into effect and although they have the force of law, of course they cannot have a force of law if they are in violation of the Act.</p>
<p>This type of contract Your Honors is a well known and long standing form as we see it for the determination and redetermination of price by an external standard.</p>
<p>We've cited cases in our brief.</p>
<p>They've been cited in the number of briefs.</p>
<p>Our adversaries have closely examined them and the best theory say is that true the rule for the determination of price by an external standard exists, but this is not a case for the application of the rule.</p>
<p>Now, we say it is.</p>
<p>We say that this is a perfect case for the application of that well established principle for the reason that we have here a standard erected of just and reasonable erected by the statute.</p>
<p>We have through an initiation of price change by the seller but an initiation addressed to an entire class so there's no choice of person or discrimination against anyone, that's attested here by the courts.</p>
<p>And procedures laid down in Section 4 which puts the eventual price beyond the control of the seller and subject to the influence of the buyer who wishes to comment and argue justness and reasonableness which is the statutory standard and that I ask you, is it to the essence of the contract of this time.</p>
<p>What utility can there be?</p>
<p>In time I had, so our customers who know the most about our rates in their business by consensual acceptance of a stipulated figure so that they cannot contest the justness and reasonableness of the rates in the Commission for the public's benefit.</p>
<p>Or, if they cannot withstand in their ascent to the particular rate, the court below held they have to do, they can come in and contest the justness and reasonableness, what does the ascent mean?</p>
<p>It seems to me a useless time wasting and expensive formality.</p>
<p>If I may call Your Honors' attention to the fact that the case is not cited in our brief has well considered this point in the New York Court of Appeals last year, the Bethlehem Steel case at 2 New York Second 46 456-460 where the court sustained a contract of sale by the Bethlehem Company allowing changes of price by in accordance with increases or decreases in regular prices to all purchasers of plain steel products and the Court said, that did not give the seller undue power of determination of the contract clause citing two of the cases in the Circuit Courts of Appeals on which we have relied.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Would you mind giving me that reference again?</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: 2 New York Second Mr. Justice.</p>
<p>It's the new series in New York Court of Appeals 456 and my quotation is at page 460 and that was summary judgment, Bethlehem Steel against Turner Construction.</p>
<p>Ours is a stronger case because we're in the hands of the Commission and we're in no position to say nor is there anybody else here I think that the Commission does not strictly and thoroughly regulate and investigate.</p>
<p>That's the protection of the interest of the consumer under the standards of this Court in the whole case where the fair return and the interest of the investor must also be considered.</p>
<p>I would like to take a few minutes before I sit down to advert one point which is received undue emphasis in the respondent's brief connected particularly with the contract history of my client, United Gas Pipeline Company.</p>
<p>Now, I have said to Your Honors that we had difficulty with this tariff system.</p>
<p>We first tendered a form of tariff, General Terms and Conditions and service agreement in May 1952 which was rejected by the Commission.</p>
<p>There are ensued correspondents between us and the Commission at pages 283-289 of the record concerning that rejection.</p>
<p>As a result of the correspondence and with anxiety to get our rates filed because we were the last to file, we eliminated from the General Terms and Conditions of our tariff certain language which our adversaries say is essential to a change of rate.</p>
<p>We retained, however, that language is at page 289, we retained, however, the language that I'm talking about any effective superseding rate schedules.</p>
<p>Now, our adversaries says, “if at the time you found your tariff, you have both the language now in the agreement and this additional language which talks about a change in price in view of an increase in cost and if you then took out the additional language upon objection, must it not be (a), that you thought the additional language was needed to give you flexibility of rate and (b) that you're taking it out to price of your flexibility.”</p>
<p>And to that, we say not so.</p>
<p>We say, the elimination of the language was due to the fact that it was deemed by the Commission to be an automatic rate escalation of power of increase without control.</p>
<p>We say that because that is what -- those are words contained in the clause.</p>
<p>In the event, an increase in seller's cost and so on seller shall have the right to revise its rate to reflect such change and we say that additionally because our adversaries in opposing the certiorari so construe the language.</p>
<p>They said in their brief which we have quoted at our -- page 15 of their brief, the Commission objected to the quoted provision as an attempt by United to reserve the right to change the rates automatically contrary to the Commission's regulations.</p>
<p>Now, we, as I've attempted to say as a result of accepting this tariff abandoned the idea of changing rates automatically and since the Commission, and Commission and counsel here construed the objected language as affecting an automatic change, we then took it out and relied upon the -- or any effective superseding rate schedule language as giving as the change by filing and Commission action upon the justification by cost and fair return.</p>
<p>Now, I thought it right Your Honors to call your attention in connection with the administrative interpretation here.</p>
<p>The fact that one of our adversaries was then on the staff Commission, who drafted that language because he is the one or who has signed the brief which says that it was an automatic escalation and an argument before the Commission on this issue he said at page 1639, Commissioner (Inaudible) will recall it was rejected.</p>
<p>The staff had objected to certain provisions including that one about seller shall have the right to revise its rates to reflect such a change.</p>
<p>The staff thought that was a proposal by United to automatically change the rates without paying any attention to the Natural Gas Act.</p>
<p>Then he went on to say -- nonetheless, as he was saying today – tomorrow, nonetheless, we argue from other language here, an admission by United Gas Corporation.</p>
<p>Now, my submission to Your Honors is under the well settled rules of administrative interpretation, the Commission who promulgated the tariff, who received the new filing who have -- have continually permitted the advocation of the existing language as we claim it should be applied, is the Commission who heard that argument from a former member of their staff who handled the correspondence and having heard it determined in passages of the record which are now in our brief that I will not take the time the read, determine the intent of the parties was an intent for flexible change.</p>
<p>We are in the same position I think that as all the other pipeline companies and gas companies whose existing rates and whose pending increases in many million are affected will be affected by Your Honor's decision of this appeal.</p>
<p>May I reserve the rest of my time Mr. Chief Justice?</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: You may.</p>
<p>Mr. Morrow.</p>
<p>Argument of George E. Morrow</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Mr. Chief Justice and may it please the Court.</p>
<p>It seems to me advisable at this time to start out with a free Statement of what we conceive the issues in this case to be.</p>
<p>The Court of Appeals sustained the position which Memphis brought up to it on the ground that United's rates -- United's service agreement as interpreted by United and the Commission in this case failed to validate the filings which United made.</p>
<p>In other words, the Court of Appeals below held that assuming that United's service agreements meant just exactly what United and the Commission said that they meant, still the -- which was an agreement upon a rate changing procedure, still the Federal Power Commission had no jurisdiction under the Natural Gas Act as interpreted in the Mobile Case to accept such a filing of a proposed change in rate and to consider that filing and to grant any increase on the strength of it.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Would you mind to infer to what you've just said that it is your view that Mobile governed this case?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Absolutely, Your Honor, like a blanket.</p>
<p>In the division of argument between Mr. Goldberg and myself, I will be discussing the facts and the law which substantiate the holding of the court below and Mr. Goldberg will take up the second leg of our argument in which the issue is whether or not the contract between United and it's customers is actually subject to the interpretation placed upon it by the Department -- by the pipelines and the Commission.</p>
<p>The Court of Appeals did not reach that point.</p>
<p>The Court of Appeals said, assuming that it is what they say it is, we still find that there was no jurisdiction in the Commission but we feel that the -- as a -- as an alternate ground in support of the Court's decision below, if it had gotten to that question, it would no doubt have found that United's -- the pipelines and the Commission's interpretation's was incorrect.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Can I ask you a question?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, Mr. Justice Harlan.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Am I mistaken in considering that the Court of Appeals' opinion holds that Section 4 procedures are not available at all except in the single instance where there is an agreed contractual rate involved in filing?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: I believe that's substantially correct, Your Honor.</p>
<p>Where the rate as between the two utility companies has been taken out of the realm of controversy and the change has been made or completed by the pipeline companies -- by the -- by the two utility companies.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: And that -- that's the -- that's the sole scope under their view that the Section 4 (e) proceeding -- Section 4 (e) procedures would have?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, Your Honor, but the -- the Court of Appeals took the view that the Federal Power Commission does not have the jurisdiction to intervene in the rate changing process itself.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: I just wanted to make sure I understood it.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, Your Honor.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: There's no question here there was a term of a change, rates or the terms of the rates (Inaudible).</p>
<p>It is the absence of agreement to change the existing rate under which service was rendered in the absence of agreement, it wasn't called the (Inaudible) the two utilities, there is no power in the part of the Commission to accept the filing.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: That's right, Your Honor in the absence of agreement upon the new rate.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Upon the new rate.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Upon the --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: The terms of the rates or changes, et cetera are besides the present problem?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, Your Honor.</p>
<p>I -- I'm -- I'm not sure that the parties to the proceeding have yet been completely identified in the Court.</p>
<p>United Gas Pipeline is of course is a natural gas pipeline.</p>
<p>It sells gas to Texas Gas which is another -- in Texas Gas Transmission Corporation, another pipeline company and United also sells gas to Southern Natural Gas Company, a third pipeline company.</p>
<p>Now, it's these three pipeline companies and the Federal Power Commission who are on the petitioner's side of the case.</p>
<p>The respondents are the Memphis White Gas and Water Division, a distributor of gas which purchases gas from Texas Gas and therefore indirectly from United.</p>
<p>And of course, the City of Memphis which appears as representative of its gas consuming public and the Mississippi Valley Gas Company which is a distributor in Jackson, Mississippi and which buys gas from all three of the pipelines involved in this proceeding.</p>
<p>I'd like to also recommend Your Honor's attention, the rendered amicus brief filed on behalf of the Public Service Commission in the State of California are supporting our position and also the Attorney General of Washington, the Attorney General of Wisconsin, the Attorney General of Tennessee, the Attorney General of Mississippi, National Association -- National Institute -- Municipal League Offices and the city of Edinburg.</p>
<p>I'd like to get down to the facts in this case as they appear on the record of this case.</p>
<p>United Gas Pipeline on September 30th, 1955 filed with the Federal Power Commission an increase -- schedules of increased rates which purported to increase their rates by a total of -- a jurisdictional rate by a total of approximately $10 million.</p>
<p>At the time United filed this filing with the Federal Power Commission, there was not a single one of its customers who even knew what the new rates were going to be.</p>
<p>There was no customer of United which had given its consent or agreement to the rates which United filed.</p>
<p>And to this good day, there is not one single customer of United that has consented or agreed to the rates filed by United in this case.</p>
<p>There is no consensual agreement whatsoever between United and any of its customers, no agreement to pay the rates which United filed and that is admitted by all parties to this proceeding.</p>
<p>Now, what -- if -- if there is no consent to the new rates, then what -- where does United get its right to file?</p>
<p>Well, it gets it from its contracts or purports to -- and particularly, from the effective superseding rate schedules language contract.</p>
<p>Now, I'd like to by way of a word of caution, I am assuming now for the purpose of my argument as the Court of Appeals did, that the effective superseding rates schedules provision contain all of the worlds of meaning which has been poured into it by United and the pipe -- other pipelines by implication and inference.</p>
<p>We don't, for one minute agreed that this is the correct interpretation.</p>
<p>This is the interpretation which United placed upon it in the record in this cause.</p>
<p>The Court --</p>
<!-- Tom_C_Clark--><p><b>Justice Tom C. Clark</b>: (Inaudible)</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: The Court of Appeals did not reach the question as to whether the interpretation was correct Your Honor, that's correct.</p>
<p>Because it is so important in this case and because the interpretation which the parties -- the pipelines put on United Service agreements in the Commission, there is only a remote resemblance to the interpretation which they seem to put on the same contracts in their briefs in this Court, I'd like to take the time to read what United said about its contracts just very briefly from the record, it's also at page 25 of our brief.</p>
<p>It's on the record on 153 and 154.</p>
<p>Here's what United told the Federal Power Commission was the meaning and intent of the words effective superseding rights schedule of the agreement (Inaudible) schedule.</p>
<p>It was any of the intent and meaning of such language and were so understood by the parties that such provision contemplated freedom and right by United to sell the file with Federal Power Commission pursuant to Section 4 (d) of the Act, notice the change in rates with consequent freedom and right in Mississippi Valley, Texas Gas, Southern Natural and all of the similarly situated to oppose and contest both the propriety and the lawfulness of the notice changed in rates.</p>
<p>Notice Your Honors that the right to oppose and contest was consequent.</p>
<p>It was a correlative contract right.</p>
<p>United goes on the say in another paragraph, “Thus, there was mutual understanding and agreement that effective rates and offending tariff was subject to notice of change filed with the Commission, skipping, followed by full right to oppose and contest such change or review with the effective tariff rates superseded by such things in tariff rates as became effective pursuant to Commission review and determination of the contest, if any, of the propriety and lawfulness of the notice change.</p>
<p>Now, Texas Gas was in such complete agreement with United at that stage in the proceedings that it simply adopted United's language, verbatim as its own interpretation of a contract.</p>
<p>United went on with specific reference to its contract with Mississippi Valley and -- and on page 26, we see where they again emphasized that the purchaser under the contract, the purchaser was free to oppose and contest any noticed change.</p>
<p>Southern Natural, United of a customer wanted to the same kind of service agreement was of the same opinion in the Commission.</p>
<p>You can see at the page 27 of our brief where Southern Natural says that the effective superseding rates schedule provision right grants to United the right to file with the Commission under the provisions of Section 4 (d) changes in rates schedules under which Southern purchases natural gas subject of course to Southern's right to oppose any such change rates in the proceeding before the Commission in respect thereto initiated under the Section 4 (e) and 5 (a) of the Act.</p>
<p>Now, all of the statements by the pipelines involved United's about its own contract contained three particular points.</p>
<p>It's a sort of three-point arrangement.</p>
<p>United was to have the contract right to file a change in rates.</p>
<p>The purchasers were to have the correlative and coequal contract right to oppose and contest that filing and the Federal Power Commission was to be the one that made the decision.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: How do they find -- they wouldn't have the right to suggest under the statute.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Under the statute Your Honor, their right to contest would depend upon the discretion of the Federal Power Commission in a proceeding under Section 4.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Do you mean that the Federal Power Commission would be free not to the deal in opposition to be not to the fact of filing but the validation of what was filed?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: That's right, Your Honor.</p>
<p>The Federal Power Commission permits intervention in accordance with its discretion.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: -- understand it, would you?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, Sir.</p>
<p>-- Yes, Sir.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Why do you have to decide the fact that they -- they just derived from the contract?</p>
<p>I don't quite appreciate the significance of your evidence.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: I -- I'll try to make it appear to Your Honor that the very purpose having the significance of it is this, that if there was a contract right on the part of the parties to oppose and contest this rate, then, there could not have been any contract obligation on the parties to pay the rate at the time it was filed.</p>
<p>You couldn't have a contract obligation to do the very thing that you had a contract right to oppose.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: I ask you again Mr. Morrow, I don't understand it.</p>
<p>Wouldn't they have all the right to oppose if not given by the statute?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: No, Your Honor, it is not.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: It couldn't oppose the going (Inaudible) the change rates?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Your Honor, the -- Section 4 of the statute says that States, municipalities, public service Commissions and so forth have the right to intervene in the Section 4 proceeding.</p>
<p>Natural Gas companies have the petition to the Commission for -- for intervention and the Commission permits them to intervene because the orders always say intervention maybe in the public interest.</p>
<p>Now, in Section 5 and this will become -- the significance of this will become important later, in Section 5 proceedings, the natural gas company has the absolute right to intervene to distribute of customers.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But the denial by the Commission did exercise only if the interest of the -- depends on the intervener is not otherwise protected for them, isn't that right?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: I think that's a matter of the Commissions' practice, yes, Your Honor.</p>
<p>The point out I want to emphasize is though as a matter of contract right the point in the parties, there was this right to oppose and contest the new rates.</p>
<p>Now, where you have a contract agreement whereby one party may propose a change or file a change, the other party has the contract right to oppose that and a third party has a right to decide the issue, you have an arrangement with all the characteristics of an arbitration procedure.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: I've been trying very hard to follow your argument and I want to see if I get it.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, sir.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: As I understand it, when you cut through always what you're saying is that absent the contract, there was no, right no statutory right to any for Section 4 proceeding at all and that what the parties had sought to do here is by contract to supersede and impose upon the Commission an administrative procedure which is not found in the statute.</p>
<p>That's your argument --</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: That is precisely yes -- yes, Your Honor.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Now, which means in to refine it a little bit with the -- you say there would be no right on United's part -- on the part of the United here to file its proposed rate change absent the so called consent in the contract?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes sir, that is correct, sir because absent the so called consent in the contract, we've got the precise Mobile case.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Since it is -- why is everybody --</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes sir.</p>
<p>Sir?</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But didn't absolute that -- when you say absolute, that it would have more meaning and that the presence of it makes no difference to Mobile?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: That is correct, Your Honor.</p>
<p>The present makes no difference.</p>
<p>The presence of the right to file makes no difference which I think I can make it clear.</p>
<p>Let me get back to this business of just exactly what kind of a preacher this contract between the parties was.</p>
<p>It was an arbitration proceeding and Southern Natural, one of the parties to the contract conceded and stated to the Federal Power Commission that this was an arbitration procedure used just those words.</p>
<p>It says that there's no reason in the law or in common sense while a natural gas company may not lawfully agree that the right specified in the contract maybe submitted to arbitration by either of the parties.</p>
<p>And it went on to say, that is exactly what has been done in this case.</p>
<p>So the contracts, it went on to say clearly contemplate that the seller may submit of the Commission on the Section 4 (d) changes in rates with the Commission acting as the arbitrator between the parties under its powers granted by Section 4 (d) and 4 (e).</p>
<p>Now, I might say that ever since that's done, Southern Natural and Texas Gas have been backing away from that term arbitration from the recognition that all this was on agreement to an arbitration procedure and they have finally come to full circle and in their briefs now, they spend several pages to explain why it couldn't possibly be an arbitration procedure, but I submit to Your Honors that this is the record in the clause.</p>
<p>This is the record upon in which the Commission made its decision and it is the record upon which this Court of course must make its decision.</p>
<p>Now, the three pipeline parties then were in full agreement before the Commission as to what their contracts meant.</p>
<p>Incidentally, the Commissions conceived the issue in this case as primarily an issue of contract construction as to what the contracts mean.</p>
<p>The Commission adopted the pipelines' interpretation completely and wholly.</p>
<p>Now, in adopting it, it of course realize of what United was really filing was a proposal, a proposal for an increase in rates subject to the opposition --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Well, does it change the rate?</p>
<p>It wasn't a proposal, it was a change rate, wasn't it?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Your Honor, it could not have been a change to rate because there's no one who agreed to pay that rate.</p>
<p>They couldn't have been a contractual --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Well, it couldn't rate a contractual change rate but it could've been -- it could've been an ex parte change rate.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Oh, but Your Honor, that's just exactly what Your Honor's opinion in Mobile held that you could not do.</p>
<p>The Natural Gas Act gives --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Where do you find that in the opinion?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: They're getting -- the Natural Gas Act said the opinion gives no right or power to a natural gas company to file a change in rate.</p>
<p>There is no one --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Maybe that's the way you read Mobile.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, Your Honor that is the way I read the Mobile opinion and stating that Section 4 of the Natural Gas Act provides no rate changing procedure.</p>
<p>And, since it provides no rate change and procedure, that's exactly what United was trying to do in the Mobile case to make a filing which -- of a rate which have not been agreed to by the parties.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: It did not meet -- the agreement in Mobile was an agreement for a specific contract rate that was the last for a fixed term, for 10 years.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, sir.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: And what Mobile -- what United was trying to do in that case to abrogate that contract by resorting to rights which it claimed it had under the Act.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Yes, sir.</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Now, that is not the situation.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: And Your Honor, I found that United could not abrogate that rate.</p>
<p>I mean --</p>
<!-- William_J_Brennan--><p><b>Justice William J. Brennan</b>: Abrogate the contract.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: It could not abrogate -- well, it could not file the new rate.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: No it could not abrogate the contract?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: But the holding was that the filing was a nullity.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Because it sought to supersede ex parte contractual agreement which United had entered into.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: As I understand the opinion, Your Honor went in to a very full analysis of Section 4 of the Natural Gas Act and showed that United could not do what it wanted to do there because it was attempting to use Section 4 as a rate changing procedure.</p>
<p>And the Natural Gas Act provided no rate changing procedure.</p>
<p>And therefore, there was -- and furthermore, that the review of power of the Commission was the sole power over rates that the Commission had, not the power to participate in the rate changing process between the companies.</p>
<p>To get back to the Commission's filing -- the Commission's finding in this case, the Commission recognized, so clearly recognized that this was a proposal that it use the word proposal four times in the course of its opinion in referring to United's proposed rate.</p>
<p>Thus, as we show at page 28 of our brief, the changes contemplated by the agreements than the Commission were unilateral changes to be proposed by United and in the last sentence of the opinion it wound up, United's proposal for increase rate in this proceeding does not constitute a prohibited unilateral change of a contract.</p>
<p>So, the Commission clearly recognized that United's filing was nothing, but a proposal as it had to be if it was an arbitration proceeding and the customers have the same right to oppose a right correlative and co-equal to rights of (Inaudible).</p>
<p>So, from there, the case went up to the Court of Appeals and that the Court of Appeals defining was made just exactly as United and the Commission argued their rates was that all they had agreed upon was the right file, in other words, the right to make the arbitration proposal.</p>
<p>And then after a careful review of this Court's opinion in Mobile, the Court of Appeals held that on agreement upon the right to make the proposal which did not take the rates out of the realm of controversy between the parties, but attempted to drag the Federal Power Commission down into the rate controversy between the two utilities, that that sort of an agreement simply was not sufficient to make these rates subject to the jurisdiction of the Federal Power Commission.</p>
<p>The Federal Power Commission said the Mobile opinion does not work on proposals.</p>
<p>Section 4 provides much for the filing of proposal and therefore there was no jurisdiction in the Commission in this case to undertake the arbitration of the contract between the parties.</p>
<p>Now, if the Court please, I want to go into a very thorough discussion with the Court, if I may, on the subject of the Mobile case because we have studied it carefully, obviously the Court of Appeals studied it carefully and we've come to the conclusion that the Mobile case does not permit the filing of the kind of rates which United filed in this case.</p>
<p>But I see that it's 4:30 at this time so I'll --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: It's 4:30 –</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: -- take that up tomorrow.</p>
<p>Thank you, sir.</p>
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Tue, 04 Dec 2012 20:36:57 +000084996 at http://www.oyez.orgUnited Gas Co. v. Memphis Gas Di - Oral Argument, Part 2http://www.oyez.org/cases/1950-1959/1958/1958_23/argument-2
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<a href="/cases/1950-1959/1958/1958_23">United Gas Co. v. Memphis Gas Di</a> </div>
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Transcript:&nbsp;</div>
<p>Argument of George E. Morrow</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Numbers 23, 25 and 26.</p>
<p>Mr. Morrow, you may continue your argument.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Mr. Chief Justice and may it please the Court.</p>
<p>Yesterday there was a question from the bench to the effect can Natural Gas Companies change their rates by any means to their customers without the customer's consent under our theory of this matter.</p>
<p>And the answer of which I gave was “No,” in solely in the reference of Section 4 of the Act.</p>
<p>Now, it is of course quite clear that Natural Gas Companies can change their rights -- their rates without their customer's consent even their contract rates anytime that they can convince the Commission that they deserve an increase in proceedings under Section 5 (a) of the Act.</p>
<p>That is the remedy which this Court said in the Mobile case was always available to a Natural Gas Company, whose rates were too low to enable it, to carry on its public service functions properly.</p>
<p>Now, the answer to that question leads me into maybe putting my last chapter first as it were so that I can explain to the Court just what we are driving at, just what the system of regulation under Section 4 and 5 of the Act was intended to be by Congress as we see it.</p>
<p>I think it becomes clear from what I've already said just now, that the only issue in this case is whether United should have filed under or should have applied for a rate increase under Section 5 of the Act instead of as it did under Section 4 of the Act.</p>
<p>There's no question that if United had a need for a rate increase that it could get it.</p>
<p>The only question is whether it could get it under Section 5 or under Section 4.</p>
<p>Now, what's the difference?</p>
<p>What's the practical difference between these two procedures?</p>
<p>Well, Section 5 of the Act is an administrative procedure whereby the Federal Power Commission in its role as the protector of the consumer interest, the public interest investigates the rate of a Natural Gas Company to determine whether that rate conforms to the public interest.</p>
<p>And if the rate does not conform to the public interest, then the Federal Power Commission issues an order at the conclusion of the proceedings which modifies the rate to make it conform.</p>
<p>And the new rate thus modified goes into effect from and after the date of the final order in the proceedings.</p>
<p>Now, the principal difference under Section 4 has to do with the refund procedure.</p>
<p>Under Section 4 of the Act the Commission also exercises the same rate review power which it exercised under Section 5, but it -- and -- and it's reviewing the existing rates of Natural Gas Companies.</p>
<p>The only difference --</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: No, you're talk about the factual difference, it does not matter (Inaudible) what is the difference if any in time making (Inaudible) for proceeding exercises.</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: That's exactly what I'm getting to Your Honor, right now.</p>
<p>The difference is the time when the rate goes into effect.</p>
<p>Under a Section 4 proceeding, if the Commission suspends the rate, then it goes into effect five months later.</p>
<p>At least it goes into provisional effect.</p>
<p>It's a sort of a pendente lite effect because at the end of the proceedings, the Commission again, after having fully considered the rate, again issues its order might find the rate to conform to the public interest.</p>
<p>But there, its order had made retroactive by this refund procedure, because if the rate which is filed is higher than it ought to be according to the Commission's final order, then the excess has to be scrapped off and refunded to the customer.</p>
<p>So, that the effect is that you've only had one rate in effect all the time.</p>
<p>So, the difference between -- practical difference between Section 5 and Section 4, is that the rate goes into effect earlier in a Section 4 proceeding.</p>
<p>It's what you might call a quicker proceeding and Section 5 the slower proceeding.</p>
<!-- Potter_Stewart--><p><b>Justice Potter Stewart</b>: How long does the effect (Inaudible)?</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Your Honor has again gotten right to the point ahead on me.</p>
<p>Section 5 proceedings historically have taken a long time.</p>
<p>The Commission in its brief cites horrible examples up to five years or six years in which it has taken, but I submit Your Honor that Section 5 proceedings need not take that long.</p>
<p>You see, as Chairman Kuykendall of the Commission has pointed out since the decision in the lower court, if a Section 5 proceeding is being used -- well, let me put it this way, up to this time, Section 5 proceedings have only being used to decrease the rates of Natural Gas Companies.</p>
<p>So, that the decreased rate does not go into effect until the end of the Section 5 proceeding.</p>
<p>Well, quite obviously, the Natural Gas Company is not anxious for the proceeding to end.</p>
<p>As -- as Mr. Kuykendall, Chairman of the Commission said the pipelines have been running away from the Commission in these five-day proceedings up to now.</p>
<p>And he points out that there might be -- that it might be possible to process them in a very much shorter time where the pipeline company wants an increase and is running with the Commission cooperating with the Commission staff in every way and working to get the -- the proceedings to a conclusion.</p>
<p>Nevertheless, even in that sort of a situation, the chances are that a Section 5 proceeding, the rate is still the slower proceeding of the two, the rate goes into effect later.</p>
<p>Now, this brings me down to -- to really what we're aiming at.</p>
<p>What we are asking is what we think Congress intended was nothing more than a fair break to the Natural Gas Company and the distributor company.</p>
<p>We expect -- we -- we think that Congress intended to put them on the same procedural level.</p>
<p>Here's what I mean by that.</p>
<p>Up until this time, Section 5 (a) has always been the proceeding by which a customer can get a decrease in rate.</p>
<p>Section 5 (a) specifically provides that a Natural Gas Company which thinks it's rates are too high can go to the Commission and -- in effect, this what happen – happens.</p>
<p>The company goes to the Commission and says, “Mr. Commission, we are bound by a long-term contract without natural gas supplier and these rates we think are too high.</p>
<p>They're not in the public interest.</p>
<p>Won't you Mr. Commission exercise your regulatory jurisdiction, investigate these rates and if you find that too high, won't you give us relief in the public interest regardless of our contracts because you've got the paramount power over those in the public interest.”</p>
<p>Now under a Section 5 proceeding as illuminated by the Mobile case, the Natural Gas Company which wants an increase can do exactly the same thing.</p>
<p>It also goes to the Commission and says, “Mr. Commission, we are bound by our long-term contracts with our customers” and may I pause to say that there's nothing involved in this case except long-term contracts, but all of the United jurisdictional contracts are long-term contracts.</p>
<p>“We are bound by our long-term contracts to our jurisdictional costumers.</p>
<p>We think we deserve an increase but our customer won't agree to that increase.</p>
<p>Now, won't you Mr. Commission” says the pipeline, “Won't you investigate our present existing rates and if you find that they are so low, that they are not -- that they interfere with our ability to carry out our public utility function, won't you grant us the right to increase those rates,” filed under Section 4.</p>
<p>Now, you see in that way, for the first time, the public -- that the Natural Gas Pipeline Company and the distributor company are placed on exactly the same procedural point.</p>
<p>The distributor company's right to a decrease is just as great, just as firm as the -- in -- in a case where it deserves it as the Natural Gas Company's right to an increase is in the case where the Natural Gas Company deserves it.</p>
<p>So all this does, this proceeding that we think United should have taken, all it does is to put the pipelines on the same procedural plane with the distributor, the distributor who directly serves the consumer, the consumer, who is the darling of Congress.</p>
<p>The consumer who's protection was the primary purpose of the Natural Gas Act.</p>
<p>That's all we are asking this Court to decide in this case.</p>
<p>That when there has been no agreed upon increase between the pipeline and its contract costumers, they go under Section 5.</p>
<p>When there has been no agreed upon decrease, between the pipeline and its contract costumer, the customer goes in under Section 5.</p>
<p>Now, that -- that makes everything in the Act fall into place.</p>
<p>It gives everything a reasonableness.</p>
<p>For instance, let's take the same thing over to Section 4.</p>
<p>There, Congress has an effect said, “Let the utilities see if they can work it out first.”</p>
<p>Now, if the two utility companies can get together on a rate increase, if the pipeline can convince its costumer that it's entitled to a rate increase and the costumer agrees to it, then you've got an agreed upon rate.</p>
<p>Then the pipeline can file that new agreed upon rate with the Commission under Section 4 in the quicker proceeding.</p>
<p>Or by the same token, if the costumer convinced the pipeline that the pipeline's rate is too high, then you agree upon a lower rate.</p>
<p>And the lower rate goes into effect under Section 4 in the quicker procedure.</p>
<p>Now, this makes sense.</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: Supposing that the Congress accept the Commissions (Inaudible) and they made adjusting their rates under Section 4 is certainly a refund for the -- would they be arguing now that nevertheless, the suppliers can only operate under Section 5 or --</p>
<!-- George_E_Morrow--><p><b>Mr. George E. Morrow</b>: Within a non-agreed upon increase, yes Your Honor because if that happened, it would simply put the industrial rates in the same category with all other rates and I've been talking about all the other rates up till now.</p>
<p>Now, let's see what sense that makes in terms of the Congressional intent.</p>
<p>Here you have a situation where you have two public utilities dealing with each other, the pipeline and the distributor.</p>
<p>Now, Congress says that if these two public utilities can get together and agree upon a rate which they as between themselves think is reasonable and then file that rate with the Commission, isn't there a -- a reasonable warrant or basis or at least temporary presumption that that rate is reasonable?</p>
<p>And therefore, isn't it appropriate to allow the new rate to go into effect under barn so it's in effect while the Commission acting in it's capacity as protector of the public interest, the third party in interest to those contracts investigates this new completed contract to see whether it serves the public as it should.</p>
<p>On the other hand, suppose the two utility companies, the parties directly involved in the rate have not been able to get together on what they consider is a reasonable rate then isn't it reasonable that the new rates sought -- whether the higher rates sought by the pipeline or the lower rate sought by the costumer, the distributor, isn't it reasonable that the new rate should have to prove itself as it were in the course of the Commission proceedings before the Commission order makes it effective?</p>
<p>The whole Act begins to take form and shape and all we're asking, I repeat once more, is an even break for the distributor and the pipeline.</p>
<p>The distributor under this theory has the same rights to a decrease as -- as the pipeline does to an increase and this gives him correlative remedies to go along with those correlative rights, to a non--agreed upon right, correlative remedies under Section 4 to an agreed upon right.</p>
<p>Now, the question is raised about the ex parte rates and I like to quote from the Court's opinion just what was said in Mobile about this business of ex parte rates because a great deal has been said in the Commission's -- well, in all the briefs about it and I think that they have completely misunderstood the impact of what the Court said.</p>
<p>The Court was saying in Section, it was discussing in Section 4, the fact that the Natural Gas Act did not change the contractual powers of Natural Gas Companies, did not interfere with or changed the rate making or rate changing powers of Natural Gas Companies and it followed that up by this sentence which is found in page 343 of the opinion.</p>
<p>The obvious implication is that except as specifically limited by the Act, the rate making powers of Natural Gas Companies would be no different from those they would possess in the absence of the Act, it's in the (Inaudible), to establish ex parte and change at will rates offered to prospective customers or to fix by contract and change only by mutual agreement the rate agreed upon with a particular customer.</p>
<p>Now, which one of those alternatives do we fall under in this Court?</p>
<p>May it please the Court there is not a single prospective customer in the picture in this case.</p>
<p>Every single customer is a long-term contract customer of United.</p>
<p>Therefore, we are obviously within the second alternative where United has no right to file an ex parte rate to us, but must fix by contract and change only by mutual agreement the rate which is agreed upon with these particular customers.</p>
<p>The Court also said, oh, and -- and let me pause there to say that it seemed to appear from the argument of opposing counsel that what we were trying to do was to demolish the Commission's regulations.</p>
<p>Now, I grant that I said what Mr. Carson quoted me as saying that under the -- in the light of the Mobile decision, there might need to be some modifications of the Commission's regulations, but those are minor.</p>
<p>We have no quarrel with the general scope intent in purpose of the Commission's regulations as explained by General Rankin.</p>
<p>Now, we do have quarrel with the message there set forth in the briefs but if you will recall, General Rankin said that the only purpose of the regulations was to take these sheets of contracts and he showed how thick it was, a lot of different complicated contracts which United had with all its customers and reduced it down to this much contract to put all of the contractual arrangements between the parties into a uniform format prescribed by the Commission and that was the only purpose of the regulation.</p>
<p>And that was the purpose that the Commission said at the time that promulgated the regulations as their only purpose and we quote them at 86 of our brief, "A presiding examiner's statement which was adopted in toto by the Commission."</p>
<p>It said the Commission's purpose in promulgating Order Number 144, which of course promulgated these regulations, was precisely as it stated in its explanatory opinion therewith that the proposed amendment of the general rules and regulations was for the sole purpose of achieving uniformity and simplicity with respect to form, composition and filing of schedules of rights and charges for the transportation and sale for resale of Natural Gas in Interstate Commerce.</p>
<p>It was solely a matter of form, and as a matter of form, we have no quarrel with it at all.</p>
<p>It was a splendid idea to get all of these complicated contracts down to a simple uniform format.</p>
<p>So, the -- the Commission's argument which it attempts to launch from its regulations on the basis of its regulations just simply won't stand up in the light of which the Commission has already said about those regulations.</p>
<p>It's clear that actually what has happened in this case is this.</p>
<p>In the Mobile case, the Commission came to the Court saying United has a right to file this unilateral change in its contract because the Natural Gas Act, Section 4 of the Natural Gas Act by providing a rate changing procedure confers upon at that right.</p>
<p>That was the Commission's argument in Mobile.</p>
<p>And this Court said, "No, it's no such thing.</p>
<p>Section 4 is not a rate changing procedure".</p>
<p>Section 4 provides not for proposals.</p>
<p>The scope of the Commission's review power under Section 4 is the same as it is under Section 5 to review the existing rates of Natural Gas Company and to make it crystal clear, the Court pointed out in Mobile that Section 4 provides no more than, let's see, provides no more than that otherwise valid rates, and if I may, here it's on page 339, it starts right at the bottom of 339.</p>
<p>In short, Section 4 (d) on its face indicates no more than that otherwise valid changes cannot be put into effect without giving the required notice to the Commission.</p>
<p>Now, how does it change yet to be an otherwise valid change, it's between these two utility companies, very simple.</p>
<p>Let's -- let's take for instance just to make it concrete, United and Mississippi Valley, United's customer company.</p>
<p>Prior to the filing of the rate in this case by United, it had a long-term contract with Mississippi Valley and Mississippi was purchasing gas from it at a certain, specific, well understood, agreed upon price.</p>
<p>Now, obviously, the price was the very heart of that contract.</p>
<p>It was integral part of the contract and they were purchasing gas at a price which had been contracted for and agreed upon.</p>
<p>Now, United wants to substitute a new rate for the rate which they have agreed upon and have been observing for several years.</p>
<p>How can it make that substituted rate valid?</p>
<p>There's only one way.</p>
<p>United has got to find somewhere, somehow an agreement on the part of its co-contractor to pay the substitute rate.</p>
<p>And that's why at the outset of this case of my argument here, I dwelt upon the fact that there has been no agreement on the part of Mississippi Valley, Texas Gas, Southern Natural, any other customer of United to pay the rate which United filed in this case.</p>
<p>The rate is not an otherwise valid rate.</p>
<p>The rate is nothing more than a proposal on the part of United which draws the Commission into the vortex of the rate controversy between these two public utility companies and that's the rate, I mean, that's under the contract as construed by United.</p>
<p>Actually, you might say our ultimate position in this case goes even deeper than that and that is that with effective superseding rate schedules provision cannot contain and cannot be interpreted to contain all of the tremendous volumes of significance which has been implied into it and inferred into it by the parties to this case and for that argument, I will turn it over to Mr. Goldberg.</p>
<p>Thank you.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Goldberg.</p>
<p>Argument of Reuben Goldberg</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Mr. Chief Justice, may it please the Court.</p>
<p>At the outset, I want to reemphasize, if I may, for a moment what Mr. Morrow has just said.</p>
<p>I want to reemphasize that Mississippi, a contract purchaser of Natural Gas from United Gas Pipeline Company has a contract with United for the purchase of Natural Gas for a specified term of years at a specified price.</p>
<p>The fact that the price is specified in the contract by reference to another document, a rate schedule in accordance with a format prescribed by the Commission's regulations to provide an easy means for the public of locating the rates involved and for the staff of the Commission in locating it, does not make that rate, we submit, any less a specified contract rate.</p>
<p>The rates specified by reference to the rate schedule is every bit as binding upon United and upon Mississippi as was the price in the Mobile contract.</p>
<p>The petitioners say, however, that there is a material difference between the Mobile contract, and the contract with Mississippi, and the contracts it has with the other pipeline petitioners in this case.</p>
<p>The difference they argue lies in this effective superseding rate schedule provisions that innocent little phrase.</p>
<p>That provision they say, implies an agreement on a rate change procedure a reservation by United of its right unilaterally to file a change in the contract rate.</p>
<p>And they say, “That's all we need under the Mobile decision to make the filing a valid filing eligible for filing under Section 4 (d) of the Act,” but we submit the provision does not mean what they claim for it.</p>
<p>The provision as the words given its ordinary made make clear, it's only explicit recognition that in a regulated industry the rate agreed upon by the parties is subject to the paramount power of the Commission to review it and to modify it while it is contrary to the public interest.</p>
<p>The legal effect of that language, is to make certain that when the Commission in the exercise of its paramount power reviews the rate and determines that it is either too high or too low depending what the case maybe that the seller and the buyer are both equally bound to continue to buy and sell gas under that contract under that new rate.</p>
<p>Thus, if the Court please --</p>
<!-- John_M_Harlan--><p><b>Justice John M. Harlan</b>: That -- that would be so in quite in respect of this clause, isn't it?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: I am not getting right to that if I may get it in to -- in the order my argument will take only a moment.</p>
<p>The Mississippi's contract we say is therefore, exactly like the contract in the Mobile case, because what is explicitly stated in the effective superseding rate schedules provision was implicit in the Mobile contract.</p>
<p>As the Court recognized in Mobile, the Commission has the power, the paramount power to review that rate and to change it.</p>
<p>And under the law, United would be obligated to sell at that rate and Mobile would be obligated to purchase at that rate because that modified rate under the law is therefore the effective superseding rate precisely what the provision in the contracts here involved talks about.</p>
<p>Now, the petitioners contend that this construction that we put on that language reduces it to surplusage because they say, if you construe with the way you argue, it only says what the law is, but the provision not only says what the law is.</p>
<p>It prevents a claim of illegality or impossibility that might be otherwise have been advanced by either of the parties if a rate ensued out of the exercise of the Commission's paramount power that perhaps they didn't care for.</p>
<p>And it's not an uncommon thing to find in contracts provisions that do no more than state what the law is because they serve the very useful purpose of precluding contentions that might otherwise be advanced and a provision that serves such as purpose we submit is not surplusage.</p>
<p>I would venture to say, and certainly my experience is pretty limited in that respect, but I would venture to say that if we can have a dollar for every contract that there is in this country that contains a provision that does nothing more than state what the law is for the very purpose I've indicated, I think we have a pretty large sum of money perhaps even large enough to make dent in the National Debt.</p>
<p>We submit that you can read that language in the contract over and over again and it'll be searched in vain for evidence of an agreement on a rate change procedure or a reservation on the part of United unilaterally to file a rate change in the contract rate.</p>
<p>There isn't any reference in the provision to Section 4 (d).</p>
<p>There's no reference of the provision to Section 5 (a).</p>
<p>There is no reference in that provision to anything that connotes a rate change procedure.</p>
<p>The petitioners recognized this.</p>
<p>They don't say that the provision expresses an agreement on a rate changing procedure.</p>
<p>They say it is to be implied and I assume that means that the provision is ambiguous and needs construction and this is a reasonable implication of the provision.</p>
<p>We think it is neither to be reasonably implied nor found when it takes at least a paragraph to state what they claim for this little phrase.</p>
<p>There's nothing in the language that that purports to say what is effective to change a rate.</p>
<p>There's nothing in it that even suggests under what circumstances a change can be made and there's certainly no agreement in it to pay any rate whatsoever or even an agreement that the mere act of filing will make the rate that United filed effective on the face of it.</p>
<p>We find in the agreement in the provision only an agreement to pay the effective and I emphasize effective, superseding rate and I emphasize effective because that provision is a limitation.</p>
<p>It's a condition upon an obligation to pay any different rate.</p>
<p>We know in the Mobile case that rates are not effective superseding rate simply because the pipeline company has filed it to the Commission.</p>
<p>In that case, United had filed a rate, the Commission had accepted it, it was treated by United and the Commission is effective, and Mobile even paid it, but this Court held that the filing was nullity.</p>
<p>It was not an effective superseding rate because the Commission had exceeded its authority in accepting that filing since it was not an agreed upon change and United had exceeded its power to file it because it was not of that character.</p>
<p>And United is keenly aware of the lack of resemblance of the effective superseding rate schedules provision to this agreement on a rate change procedure or even a reservation of the right to file rates.</p>
<p>And they're keenly aware of the rule of contract construction that says that a contact is to be construed more strongly against the draftsman and of course for draftsman of the contract, its creator, its author is United.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Would it make any difference to your argument that instead of the phrase as founded the service agreement which you're addressing yourself, the word were these, under settled rate schedules or any rate that maybe subsequently filed with the Federal Power Commission, would that make a difference to your argument?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: I -- I think so if I have -- have in mind the revision of the provision.</p>
<p>I think that the --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: (Voice Overlap)</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: -- provision was only be eliminate --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: -- any rates that maybe subsequently filed with the Federal Power Commission, would that make a difference to you?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: I think so if I understand the revision.</p>
<p>I think the revision was to exclude from the language that's on page 9 of our brief the word “effective”.</p>
<p>Yes, I think so.</p>
<p>I think it would probably make a difference.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Well, but wouldn't the law --</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Because we --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Wouldn't it be effective to be in there by force of law?</p>
<p>No rates can be -- no rate is determined unless it's effective according to the determination by the Commission.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: But Mr. Justice Frankfurter, that provision would then be susceptible of the interpretation that the purchaser had agreed to pay whatever rate United filed and that was the rate --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: He could agree to that.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: I don't understand why not.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: He could not agree to that because of the controlling power of the Commission determined the public interest.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: But he can agree to a new rate.</p>
<p>Now, even though United and the purchaser agree on the rate, it does not mean that the Commission is precluded from reviewing and modifying it.</p>
<p>That's where --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: That's what they mean by effective.</p>
<p>Effective means that which the regulatory body determines eventually is the legally and plausible rate.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: That's exactly our contention that the inclusion of the word “effective” has reference only to rates that achieve their effectiveness through the exercise by the Commission of its paramount review policy.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But my question to you is, whether effectiveness isn't necessarily qualify in every agreement between parties?</p>
<p>So, no amount of agreement that leaves out the word “effective” can leave out the power of the Commission to determine what count --</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: With that, we thoroughly agree.</p>
<p>We certainly --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Whether effective doesn't need to add or subtract because of law does that.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Mr. Justice Frankfurter if I understand that I have some trouble with that, may I try to explain my difficulty?</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: You take care of my difficulty [Laughter]</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: I certainly -- I certainly would -- would hope -- of my being here is -- is pointless.</p>
<p>As we read Mobile, the Natural Gas Company and its customers have complete freedom to initially enter into contracts and to negotiate new rates.</p>
<p>Now, as we read Mobile when the pipeline company has that kind of a rate, it may file it under Section 4 (d).</p>
<p>That rate is made effective by its own action as the Court said in Mobile as we read the case by giving to the Commission the notice required by the notification procedure.</p>
<p>Now, the Commission may decide to do nothing about it and then they may charge it or it may suspend it.</p>
<p>Now, as we see it that agreed upon rate if it is permitted to become effective, of course may then be charged.</p>
<p>If it is suspended, its provision would become effective at the end of the suspension period and then again maybe charged by the pipeline company.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Unless in the meantime the Commission disposes of it --</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Oh yes.</p>
<p>If -- if the Commission and the interim period has concluded the proceeding, it never really becomes the rate that they charge.</p>
<p>They charge only the rate that the Commission determines at the conclusion of the proceeding.</p>
<p>Now, I -- I think I see now what Your Honor was getting at that despite the agreement of the parties, effective superseding always means that which the Commission accepts for filing and permits to become effective by its authority under the Act.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Can it mean anything else?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: I think not.</p>
<p>I think --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Alright.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: I certainly, would have to agree that it could mean anything else having come through to the same point by my own exposition.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: That means whether effective is there or not, effective depends on what the Commission does or doesn't do but not by the agreement of the problem.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: I -- I see Mr. Justice Frankfurter's point that even if it were agreement to pay any superseding rate, it would have to be an effective superseding rate that could be charged.</p>
<p>But the point I was trying to make was, that if the word “effective” had been left out, you could possibly interpret that as meaning that it is at least an agreement as between the parties by the purchaser to pay what is tendered to the Commission vis-a-vis the parties without bringing in the Commission's authority.</p>
<p>Now, if I may, as I was saying, United is keenly aware of the lack of resemblance of this provision to an agreement on a rate change procedure and it is keenly aware of the provision of the -- the rule of contract and construction that says a contract is to be interpreted most strongly against the party drafting it which as I said was in this case United.</p>
<p>It therefore tries to raise the provision to the stature of the term of art in the industry which it says was accepted as evidencing an agreement on a rate change procedure.</p>
<p>There's simply nothing to this.</p>
<p>This is an act of rationalization.</p>
<p>Prior to Mobile and our motions to reject, it was not thought, it was never suggested that the power to change rates was derived from the contracts or any provision of contract between the pipeline company and their customers.</p>
<p>In fact, the argument in Mobile was that power was derived from the Act and that it existed regardless of what there was in contract against it.</p>
<p>The Act was considered to be the source of the authority.</p>
<p>The contract argument was a development of Mobile and of our motions to reject and was advanced to meet those developments.</p>
<p>And we submit, that United has turned to the contracts for escape for Mobile and this little effective superseding rate schedules provisions has been selected as the candidate most likely to succeed as the provision in their opinion more susceptible to interpretation of the view they tried to put upon it.</p>
<p>The provision is of course no term of argument.</p>
<p>If it were, we would expect to find it in each of the contracts in the industry in precisely those terms, but the Commission itself concedes, and I believe the concession appears at pages 111 of its brief, that the contract language varies as between one Natural Gas Company and its customers and another Natural Gas Company and its customers and we have printed as Appendix A to our brief.</p>
<p>The provisions from the formal contract that Texas Gas Transmission Corporation uses which is one of the pipeline petitioners in this case, and that appendix discloses immediately that they employ an -- an entirely different set of words for what I might call their effective superseding rate schedules provision.</p>
<p>And additionally, it discloses that they did include an express reservation to change rates under certain specified conditions and the specified conditions were when certain increases incur when increases incurred in certain specified taxes.</p>
<p>Unless these contracts are held to mean what they say, the publication provision of Section 4 (c) of the Act which says that the contracts need to be published, so that they're available to the public and people may know what's in them, we submit would be frustrated.</p>
<p>In interpreting this contract and considering it, we cannot lose sight of a fact that it wasn't drafted by an amateur.</p>
<p>It was drafted by United which Mr. Carson yesterday described as one of the largest pipeline companies in the country.</p>
<p>We think perhaps it is the largest.</p>
<p>It has all sorts of resources at its command, including rate experts and the most skillful of counsel.</p>
<p>The drafting of rate contracts for United, of rate schedules, of tariffs is a day in and day out occurrence.</p>
<p>And when United sets out to draft the provision reserving the right to file a change in rates United knows how to do it and we don't have to infer that.</p>
<p>We have the contemporaneous evidence in this record as to the meaning and intent of the contract.</p>
<p>The only contemporaneous evidence I might say which shows that United never regarded the effect of superseding rate schedules provision as a reservation of a right to file changes and never intended it to perform that function.</p>
<p>Let me briefly describe that history.</p>
<p>As Mr. Carlson told you yesterday, United had brought the Commission for about four years in and out of the courts challenging the validity of the regulations, which incidentally it now embraces and the most wonderful thing that ever came down to pipeline.</p>
<p>United finally, in 1952, decided that it would comply with the Commission's regulations.</p>
<p>So, in accordance with those regulations it prepared a propose tariff.</p>
<p>Now, the regulations say that in the tariff you're supposed to have the proposed form of contract you will use for the purchase and sale of gas.</p>
<p>United therefore, drafted a proposed form of contract included it in the tariff.</p>
<p>The proposed form of contract included the effective superseding rate schedules provision that we have before us today and additionally, as we set out at page 57 of our brief, I think it is, it's at page 57 yes, included a provision expressly reserving the right to file changes in rates.</p>
<p>If I may take just a moment to read it, “the rate established by seller,” United said, “are designed to reflect seller's cost of rendering service to provide a fair rate of return to seller.”</p>
<p>In the event of an increase in seller's cost, or of any change which would result in the rate of seller providing less than a fair rate of return, seller shall have the right to revise its rates to reflect such change.</p>
<p>Such revised rates shall be charge only after they have them filed to the Federal Power Commission and become effective in accordance with its rules and regulations.</p>
<p>Now, unhappily perhaps the United, it included this very same provision in the general terms and conditions of the tariff.</p>
<p>The Commission's regulations expressly state you may not include that kind of a provision in the general terms and conditions.</p>
<p>The regulations say, you may include that kind of provision in your form of your contract only.</p>
<p>The Commission therefore, rejected the propose tariff concluding the form of contract and returned it to United pointing out that they had never accepted a tariff which included the provision but what that they having accepted forms of contracts that included such provisions as authorized by the regulations.</p>
<p>The United was extremely anxious by this time after filing to the Commission for four years to have its tariff accepted as rapidly as possible.</p>
<p>And United was laboring under the impression that the Commission would require a rephrasing of the provision before it would even approve it for inclusion in its form of contract.</p>
<p>Rather than incur the additional delay that they thought might develop, they struck the provision not only from the general terms and conditions, but they struck the provision from the form of contract as well.</p>
<p>And the form of contract which was approved without this provision became the executed contracts for the purchase and sale of gas that we have before us in this very case.</p>
<p>And now, faced by Mobile, faced by our motions to reject, United seeks to read in that -- into that effect a superseding provision a wholly different provision which of its own volition it had deleted.</p>
<p>Even if United were able to hurdle this contemporaneous evidence of their intent, there is yet another hurdle before that.</p>
<p>I'd -- I'd like to refer the Court for a moment to this little pamphlet which is the appendix to United's brief at page 16A.</p>
<p>I'm particularly, interested in the middle portion of the middle proviso, which says and I'm going to skip a few words that refer to another section that are not material here, “a Natural Gas Company may state in the service agreement that it is or will be its privileges under certain specified conditions to propose to the Commission a modification, change or substitution of the then effective rate or charge.”</p>
<p>And incidentally, may I interpolate here for a moment to say the reference to certain specified conditions has reference to various components of costs involved in serving -- in selling gas that may go up and down if the case maybe, taxes, cost the gas purchase and so on.</p>
<p>Now, United was on notice as to what it had to do to reserve its right to file rates.</p>
<p>And the provision that it voluntarily deleted was in response to this permission that the Commission was giving them in the rules and regulations.</p>
<p>Now, the effective superseding rate schedule provision doesn't even begin to come close to meeting the requirements of this regulation.</p>
<p>It does not even remotely specify any terms or conditions under which it would be United's right to file changes in rates.</p>
<p>And if it were to be interpreted as United now contends, it would be unlawful under these regulations as the Commission's recent decision in the Houston case which we cite and discuss at page 62 of our brief, makes very clear.</p>
<p>In that case, there was a new pipeline company that had been certificated.</p>
<p>Houston, Texas Gas and Oil will take gas down to Florida.</p>
<p>In accordance with its right and under the Commission's regulations, it undertook to prepare its tariff and there again, it included a proposed form of agreement.</p>
<p>The Commissioner rejected it and let me read just quickly the language used by the Commission in rejecting it and I quote, this is at page 62 of our brief, “In the form of service agreement, no changes for the filing of changes are set forth while Section 154.38 (d) (3),” I interpolate the section we were just looking at, “of the Commission's regulation, requires that the service agreements set forth, the specified conditions under which a change my be filed.”</p>
<p>Accordingly, the Commission said, “The present language of the form of service agreement is not allowable and revised tariff sheet should be filed enumerating the conditions, if any, under which rate changes may be proposed.”</p>
<p>This provision would have to be rejected for the very same purpose.</p>
<p>And to interpret it as they would contend, just flies in the face of that provision and the contemporaneous evidence.</p>
<p>If there is any lingering doubt that the effective superseding rate schedules provision was not intended to perform the function that the petitioner is now claim for it, we submit that doubt is dispelled when the unconscionable results that are produced by petitioner's interpretation are considered when applied to sales, for resale, for industrial use only, which have heretofore been referred to.</p>
<p>Such sales are particularly important to Mississippi as they are to many other distributors.</p>
<p>For example, as we indicate in our brief, and United does not deny this, Willmut Oil and Gas, another contract customer of United, purchases gas under United's rate schedule, which it has provided the sales, for resale, for industrial use only, 45% of its volume of sales is that type of a sale for industrial use.</p>
<p>And the United only answer is, “Well, it's only to one customer.”</p>
<p>Whether it's to one customer or 10 customers, however, 45% is an important part of that utility's sales.</p>
<p>In the case of the distributors of gas in the Pacific Northwest, as the amicus brief of the Attorney General of the State of Washington makes claim, 68% of the sales made by the distributors in that case, for industrial use are purchased under contracts of this non-suspendable, non--refundable type.</p>
<p>And Mississippi, for the period involved in this case, its purchases of gas from United or sales, for resale, for industrial use only, represent the 65%.</p>
<p>And let me pause here to say that in the answering briefs, we have been vigorously challenged as to the accuracy of our 65% and I might say to the Court that that 65% was computed for me at my request by responsible official of Mississippi Valley Gas Company.</p>
<p>And it's obvious to me, although, I can't for the light of me analyze all of the figures that have been thrown at me in those answering briefs and where they come from.</p>
<p>It is clear that they are talking about some percentage in another period not involved in this case when they say the percentage is only 20%.</p>
<p>Well, let me make this point, whether 20% or 65%, the point is that it is significant either at 20% or at 65%.</p>
<p>Let me, for a moment, before I get too deeply into an explanation of the significance of these sales, repeat in part what Mr. Morrow has pointed out.</p>
<p>Except for sales, for resale, for industrial use only, the Commission has the power to suspend new rates, and if the proceeding is not concluded at the end of five months, they become effective subject to refund on motion of the Natural Gas Company.</p>
<p>When the Commission concludes its proceedings, they can make it retroactive.</p>
<p>But with respect to sales, for resale, for industrial use only, the Commission has no power of suspension and it has held that it is completely without power of refund.</p>
<p>Those new rates are non-suspendable, non-refundable.</p>
<p>They come -- they become effective 30 days after filing.</p>
<p>Now, let's see the consequence of that.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Would you mind stating in a word what the policy of Congress was in that provision of the Act?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Mr. Justice Frankfurter I don't think that I -- I can.</p>
<p>I would like to explain why I don't think I can.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Don't take your time (Inaudible).</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Well, I simply want -- I simply want to say that there's just a jury of legislate -- legislative information.</p>
<p>It seems to have suddenly come in at the end of the legislative debates and I don't think anyone can really say what in the world caused that?</p>
<p>I know when I was with the Commission, we wrestled with it, and I think perhaps they're still wrestling with it over there.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Anyhow it is the policy of Congress?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Oh, yes.</p>
<p>Yes, I -- I would certainly have to say that.</p>
<p>Now, but the significance of it is -- is that they are contending, Mr. Justice Frankfurter, that a purchaser of its own volition agreed to enter into a contract that granted to its supplier the power to impose, to exact, and to retain at will whatever United, under petitioner's interpretation of their contracts chose to file.</p>
<p>Now, let me bring it right back to the case at hand.</p>
<p>The increase filed for that class of sale was about $650,000 in round number out of the total increase to Mississippi Valley of about, let us say, $900,000.</p>
<p>Now, under petitioner's interpretation, that filing maybe made, it goes into effect 30 days after it's filed because the Commission is without power to suspend it, and they can charge it and collect it for as long as that proceeding is pending.</p>
<p>And when that proceeding is over and the Commission says, “United, you had no right to charge that rate.</p>
<p>It was excessive all through that period and you're not to make that charge to the future.”</p>
<p>And Mississippi then says, “United, how about giving me my money back” and United says, “Sorry, we pocket that.”</p>
<p>The Commission has held it has no power of refund.</p>
<p>Now, we submit that no responsible officer of Mississippi, the board of directors of Mississippi, no responsible officer of any distribution company would enter into a contract for the purchase of gas, which is essential to its economic wellbeing, which is essential to its ability to sell gas to domestic customers at rates within their reach, to grant to their supplier the power at will in their unfettered discretion to file any rate they choose and to collect it from the date 30 days after filing.</p>
<p>And even this prospective relief is illusory because, again, in its unfettered discretion, as soon as the Commission has issued its order saying that the rates of the past were unreasonable and they should be reduced for the future, United can again come forward with a new rate increase for this class of service and it becomes effective within 30 days.</p>
<p>In this very case, during the pendency of these proceedings, United has filed three additional rate increases unilaterally for this type of service and United has been collecting it under its interpretation.</p>
<p>Now, we submit that it's just simply inconceivable and unreasonable to interpret the provision as an agreement by Mississippi to confer such a power on its supplier.</p>
<p>Mississippi denies and we have denied it repeatedly that we ever intended to come to such an agreement.</p>
<p>Let me take a moment to explain the significance of --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Is there anything in the entire administrative practice before the Commission to choose to rely on this problem?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: As to why there is no power is suspended --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Either -- pointing either way, either for the position asserted by the Commission at the present time or in favor of the groups.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: As to the interpretation of the context to this.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: No.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: As to the interpretation of Section 4.</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Oh, on this --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Is this the first case of the Commission is ruled, made a specific ruling?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: This is the first case I think that the Commission ruled at the moment.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Is this the -- is this marked change in -- in procedure before the Commission?</p>
<p>Is this a new ruling or does this follow old precedents?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Oh, under -- this -- this power of lack of refund power, I'm not sure that -- yes, let me put that thing.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: The ruling of the Commission in its construction of Section 4 in this case, is that --</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: That's a -- that's a --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Is that the --</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: That's a new one.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: That's --</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: That's a new one.</p>
<p>That was a construct -- well -- well, if -- it did -- I was going to -- I was just about to say that it didn't construe Section 4, but it construed the contracts, but actually, it had to do both.</p>
<p>It turned to the contracts and said this is an agreement on a rate-changing procedure, and then it turned to (Voice Overlap) --</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: I know what -- I know to give.</p>
<p>I know what to give.</p>
<p>But I say is this first time they ruled that way?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Yes.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Or are there any contrary rulings in earlier years, since the change of Commission policy, this hearing the Commission policy?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: The first time -- the first time it was brought up.</p>
<p>I've been trying to go but Mobile came along and this problem in our case was the first one arising after Mobile.</p>
<p>I think we were the first, perhaps not the first, but the first decision that came down on the motion to reject.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Do you cite the holding of the Commission in connection with inability to get refund?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: Yes.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: What is it?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: That they made that decision in the Mobile case, I think it's in 64 of our brief.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: It's at what?</p>
<!-- Reuben_Goldberg--><p><b>Mr. Reuben Goldberg</b>: At page 64 of our brief, Footnote 35.</p>
<p>Incidentally, that was the order in the Mobile case which came up to this Court and we'll review again in the Mobile case.</p>
<p>Let me take just a few minutes to point out the Commission in its brief spends a great deal of time parading all sorts of public goblins and calamities before the Court in an effort to secure a reversal of the decision below.</p>
<p>But we have given chapter and verse on the actual experience of the industry since the decision of the court below, and that actual experience completely contradicts the Commission's speculations which incidentally are completely undocumented.</p>
<p>One thing we pointed out, for example, when the Commission raised the specter of inability of the pipeline companies to raise capital, we said why?</p>
<p>Here is evidence that these pipeline companies, since the Memphis decision, since the decision of the court below, have been able to raise capital.</p>
<p>They have received a very favorable reception of the market, in some cases, even more favorable than the reception that they received prior to the decision of the court below.</p>
<p>And the Commission is unable to deny that.</p>
<p>It conceived in its answering brief that that's the fact, but what is the Commission's answer?</p>
<p>The Commission says, “Well, in every one of those cases, there were some special factor that accounted to the favorable reception.”</p>
<p>In other words, when the news is bad, blame it on the decision of the court below, but when the news is good, shrug it off, blame it on something else.</p>
<p>The decision of the court below had nothing to do with it.</p>
<p>We submit that the decision of the court below is completely right.</p>
<p>It helps restore that stability of supply arrangement, that order of chaos, which this industry needs to be a healthy industry.</p>
<p>Thank you very much.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Solicitor General, would you mind addressing yourself to this last point that counsel has taken up, namely, the -- as I understood it yesterday, it was your argument and the argument of Mr. Carson that all this would do would be to give the opportunity to the Commission to study the situation and that later there would be a refund of any access that they found to be beyond the public interest.</p>
<p>Now, would you -- would you mind telling me if I -- if I understood you correctly yesterday or whether there are some circumstances where there will not be any refunds in the event the Commission finds that the new filings where not in a public interest.</p>
<p>Argument of Rankin</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: I will make it very clear that there are cases where under the Act, it is impossible as the Commission construes it to make refunds and those are the limited cases of less than 2% that involved industrial rates.</p>
<p>To that extent, there is no provision in the Act as the Commission construes it for a refund of those rates that are not properly although initiated they are -- they are found later to be unlawful.</p>
<p>Now, our brief shows that the claim of the Mississippi Valley is not correct as to the amount of gas that it buys on industrial basis when it claims 67%.</p>
<p>We point out that there is some 27% in one year and it's down to 6% but there still is a fact that as to the 2% of the regulated rates or jurisdictional rates in the country, there is no provision for refund.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Yes.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Now, they don't call your attention, however, to the fact that they have a provision for automatic escalation as to everyone of these contracts in Mississippi Valley so that if the rate is raised to them, they pass it on immediately under their contract to the industry customer purchaser.</p>
<p>Now that doesn't protect the consumer, I want that clearly understood.</p>
<p>The consumer doesn't get it back, but it does put them and that's -- if they have been frank about that, they would have shown the Court that there is obvious reason why they wouldn't care too much what the -- the rate whether or not their new rates were filed as long as they had a provision for automatic escalation in their contract.</p>
<p>Now, I was trying to point out yesterday that although there is no provision for that refund, the industrial buyer buys at a cheaper rate so that he can figure that even though I pay an increased rate, I still get it a lot cheaper than I -- if I bought the susependable rate which is also available to him in Pacific Northwest.</p>
<p>I don't know that is available in all cases.</p>
<p>I didn't examine that as I tried to tell the Court but I know in Pacific Northwest, it was available.</p>
<p>They had both rates available to industrial buyers and they deliberately bought the cheaper rate because it was -- they took the chance and they were still better off on the increase and if they bought the suspendable rate where they would get the refund.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: To gain that figure yesterday Mr. Solicitor, 2%, do I understand that to be the total gas consumed subject to regulation by the Federal Power Commission of that close to, whatever it is only 2% is non-recoverable becomes non- sustainable.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Is that what you're saying?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That is correct.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But the total volume of gas subject to regulation was consumed and subject to regulation, only 2% falls under this non-recoverability.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right.</p>
<p>I've checked that carefully.</p>
<p>Now, of course, the Commission has asked that it be given that power even as to that 2% and it has asked to repeal it over the years.</p>
<p>Congress has seen fit not and the history indicates that these are short term contracts and that the Congress at the time in speaking about it, felt that it was not a particular problem.</p>
<p>We set up that legislative history but the Commission has still felt well, even 2% we ought to try to care of but we haven't been able to persuade the --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Under all the -- this 2% are -- are the class of large consumers?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Well they're well able to take care of themselves.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: All right.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: They're powerful industry people generally, they make individual contracts, they're usually for short term and they have stand-by provisions for oil or coal or other provisions because most of them are uninterruptible that is the service can be stopped in order to take care of people at home and --</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: But as --</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: -- so forth.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: -- but as your own statement indicates, they're well able to take care of themselves at the expense of the consumer and I take it the Commission wants that power in order to protect the consumer indirectly.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Well, I think they could do a better job myself.</p>
<p>I think that they would have to look at what they say to the Congress in order to say exactly but they have asked it time after time Congress seem fit not grant it.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Who gets the refund of the others?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: The refund goes back to the customers, disposed of it.</p>
<p>It goes back to distribution company and as I said to the service station --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Does the law require that?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: The law requires it.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: The distribution -- distribution company does it go back to the person who buys the gas?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: I can assure you that it does.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Has it even done it?</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: I -- I have been advised that there are cases where it has.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: This Court had given you trouble on that subject?[Laughter]</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right.</p>
<p>You asked me that before in the City Service case and I answered the best I could.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Alright.</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: I -- I know it goes back to distribution companies because the Commission orders it and sees that it does.</p>
<p>Whether it goes back to the consumer is something else and I can't assure it.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: A difficult problem with --</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: That's right.</p>
<p>Now, I would like to call attention to the Houston case.</p>
<p>It's been referred to particularly this Houston case as an example of where it's inconsistent with our position and that is not correct.</p>
<p>We treat that on page 26 of our brief in the Footnote and we point out specifically that the problem was this.</p>
<p>The service agreement is required by the regulations to be set out in the form -- a form to be set out in the tariff schedule and in this they have some language to the effect that it would be as the buyer and seller have agreed upon the rates and which are set forth here in below.</p>
<p>So there was the form and it said has set forth here in below.</p>
<p>Now, the reason the Commission wouldn't prove that was that they construed it would give the buyer to the seller the opportunity to have a different provision for everyone of their service agreements because of the saying which are set forth here in below.</p>
<p>And they specifically said they couldn't do that because it would take away this principle they were fighting for and have held for all the way through in this terms and service agreements program where the -- the rates for certain class of service and area are to be uniform and without any preference and discrimination.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Carson.</p>
<p>Argument of Ralph M. Carson</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: Mr. Chief Justice and may it please the Court.</p>
<p>By way of correction of an inadvertence yesterday and for the record, let me say that the docket number of the 10-year Section 5 (a) proceeding in our case which has just been completed is G1142 and not 1428.</p>
<p>The facts are as I otherwise stated.</p>
<p>And before I go too far from the Chief Justice's question, let me by way of supplement to what the Solicitor General has said with all of which we agree, say that as shown in our reply brief, only 1.8% of all United Gas Pipeline's jurisdictional sales go or sale or resale for industrial use only.</p>
<p>Now that is another term of argument, if the Court please, because it's the language of Congress.</p>
<p>Direct industrial sales are not subject to regulation.</p>
<p>Sales or resale only are subject to regulation and the Non-suspendability Clause applies in Section 4 -- in Section 4 to sale or resale for industrial use only what is usually called in the tariffs an I-rate meaning industrial rate or interruptible rate.</p>
<p>They aren't guaranteed of both amendments and for that to get a lower price and they buy in large volume and their large-volume usage usually what they call a volumetric rate not always, of course.</p>
<p>But – now the trick in the statistics is this as our reply brief shows that many of these distributors buy it from us and other pipelines on a g-rate, a full commodity and demand schedule with a specified regular billing demand and supply and in off-peak periods they divert some of that consumer gas to industrial use.</p>
<p>Now, that's not the sale by us or resale for industrial use only therefore, it's not a non-suspendable sale, it's a suspendable sale.</p>
<p>So, counsel can tell you “Oh, we resell, it's a great percentage of our gas for industrial use.”</p>
<p>They don't buy it from us for resale for industrial use and it's a great deal of the gas that they sell in industries is suspendable as to increased rates.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Mr. Carson, would it make any difference in your position whether your figures were right or -- or the respondent's figures were right?</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: Yes, insofar as extended as a legal volume (Voice Overlap) --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: The legal principle.</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: The legal principle I would like to address myself to as a matter of Congressional policy sir.</p>
<p>Now a question was asked to Mr. Goldberg, what the Congressional history was?</p>
<p>And he said it was so slight that it didn't matter as I understood him.</p>
<p>On the contrary, I cited in our brief this question was carefully considered.</p>
<!-- William_O_Douglas--><p><b>Justice William O. Douglas</b>: Is your reply brief (Inaudible)</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: No sir, it's on our main brief and I did not put forth the quotations and I do not think I should take rebuttal time to read the quotations, but I can assure Your Honors that in 81 Congressional Record part 6, page 6727, Congress related -- referred to the industrial sales as based on the short term character of the contracts to which General Rankin referred and at a subsequent page which would be as a subsequent to that the introducer of the bill, Mr. Lee, described the construction of transmission systems and the necessity of getting industrial contracts and subsequently in the same part, he said, "This practice of the Commission's has permitted the Natural Gas Companies to compete for industrial fuel business and that produced revenues which have resulted in much lower schedules of natural gas rates to the householder then the rates would have been had the industrial sales have not been made" and then at pages 1844-45 in specific answered to Congressman Pettengill in connection with the suspendability point and the natural monopoly of electricity, Mr. Pettengill said, “And he's not competition the best regulator price there is?"</p>
<p>And the witness said, "I think so, I think that is true to Mr. Pettengill."</p>
<p>And you'll find them in the Senate record that gas -- that gas was regarded as regulated in competition by coal and by oil.</p>
<p>That's the reason, Your Honors for this determined policy of Congress which has not been changed.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: That is not quoted in your brief.</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: It is cited in our brief but not quoted in extense Your Honor, but the history is there as a determined policy of Congress and may I just add in connection with the escalated cost as to which General Rankin calls attention.</p>
<p>Your Honors, bear in mind that these users of industrial non-suspendable gas had protected themselves on distribution and their customers have accepted the protection knowing the non-suspendability.</p>
<p>By a provision or rate increases to the consumer, if the rate goes up to the distributor, that means that the existing mechanism of rate filings has been understood by all concerned to permit increases under Section 4.</p>
<p>Another example (Voice Overlap) --</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: Are any of these purchasers or resales to industrial users offered any resistance to the effective superseding rate of this --</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: No sir.</p>
<!-- Hugo_L_Black--><p><b>Justice Hugo L. Black</b>: How do they explain that?</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: Well, I suppose the availability of competing fields on a standby basis is always there.</p>
<p>They get lower rates.</p>
<p>General Rankin was entirely right yesterday in giving you the figures in the Pacific Northwest in Washington where the increased rate was less than the general rate.</p>
<p>And the reason is I think really that everybody has recognized as the Commission opinion says that this method of change under the effective superseding rate schedule language is an effective method accepted by everyone.</p>
<p>When Justice Douglas asked if there have been rulings on this problem, I think the answer was literally correct.</p>
<p>The Mobile case hadn't been decided and there hadn't been a motion made to reject a filing on what we deem in this application of the Mobile case.</p>
<p>But this effective superseding rate schedule language is in use not only in our contracts, but in the contracts of nine other companies whose names I have here alone and has been in use since 1945 and prior as is shown in the citations on page 53 in our brief to the Commission record at no doubt at the time when Mr. Goldberg as he said was with the Commission.</p>
<p>And universally, these filings have been acted on, recognized and received as a medium of rate change.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Are you saying if I understand, you correct that this phrase that I was about to ask you what is the phrase, as I understand your (Inaudible) this phrase is found in contract in 1945 --</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: Yes sir.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: -- and filings have been made under it since 1945 before Commission.</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: Continuously and rate increases acted upon accepted both of course as to reasonableness or accepted as the propriety of filing uniformly.</p>
<!-- Felix_Frankfurter--><p><b>Justice Felix Frankfurter</b>: Well, that's all we have here now with the prior to the filing.</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: For prior to the filing it's what we have here now.</p>
<p>Of course the proceeding under the suspension of the order of the Court of Appeals and I am gratified to be able to perform on Court that the proceeding on this filing 9547 and that's on the subsequent filing which I warned the Court that increased costs required is coming into a completion and unless this Court's affirmance to the decision below throws the proceeding out, the work will not have been wasted.</p>
<p>But at page 53 of our brief, we have given all those citations and the prior history of the Commission.</p>
<p>Now, I was slightly surprised to hear counsel argue to the Court that the filings of fact below were wrong.</p>
<p>He argued contemporaneous evidence.</p>
<p>He argued construction by conduct and other matters which must lead to our brief.</p>
<p>All those matters have been determined by the Commission and all those matters as I think have been accepted by the court below, because I think that counsel was in error in telling Mr. Justice Stewart that the court below had not reached this point.</p>
<p>I think at page 257, no that's not the correct page.</p>
<p>I will refer to page 405 of 250, F.2d where the Commission's findings that the --</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: It is in the record?</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: Yes, Your Honor.</p>
<p>It is in the record.</p>
<p>It's in my Appendix.</p>
<p>Rebuttal of Rankin</p>
<!-- Rankin--><p><b>Mr. Rankin</b>: Beginning of page 267</p>
<p>Rebuttal of Ralph M. Carson</p>
<!-- Ralph_M_Carson--><p><b>Mr. Ralph M. Carson</b>: It's at page 267.</p>
<p>Thank you, Mr. General Rankin page 267 of the record.</p>
<p>The Commission found that the phrase so on did provide the consent and that was an accurate quotation to the Commission's finding.</p>
<p>Then the Court says, in effect of the Commission's position is that the contractual consent to the act of filing is sufficient for Section 4 (d).</p>
<p>I respectfully suggest that is a misstatement of what the Commission held as just quote.</p>
<p>Then the Court goes on, “Correct though the Commission's statement that the parties intent maybe, it does not answer the question and go on, it goes on to the point of law which it was deemed erroneously.</p>
<p>This Court has decided in the Mobile case.</p>
<p>At page 269 of the record, there is also a statement by the court below towards the bottom of the page, albeit some of those customers may have consented to the act of filing.</p>
<p>Now, it seemed to me that when Mr. Goldberg told Justice Frankfurter that the effective superseding orders did not detract from the validity of the contract and the contract as restated by him without those would have permitted to find he had considered a way this case and I think necessarily so.</p>
<p>I leave to our brief the fact pages 17 to 18 of our brief every word effective, superseding on file comes from the statute or the regulations which are binding on us.</p>
<p>I'm interested in the suggestion that perhaps they're' not wholly valid but Your Honors have not been told to what extent they're not wholly valid.</p>
<p>But in any event, those words are terms of art and they take with them a great deal of history and Your Honors look back to the beginning of the filings -- the beginning of this book, you will see in the early rate schedules, stamped at the top the word “superseded.”</p>
<p>One of the words in the regulations showing this has been taken away and the new schedule has taken its place which the Mississippi Valley among others has agreed to pay according to the new rate.</p>
<p>I called your attention to the fact also that the court in as pointed out in the brief I'm glad to say of Texas Gas and Southern Natural who concurred with us in the interpretation of this contract, the Mississippi Valley contract service agreement among others having the effective superseding rate schedule language has also the sentence which Your Honors attention has not been called early, I regret I must sit down but I refer to the bottom of the page 112.</p>
<!-- Earl_Warren--><p><b>Chief Justice Earl Warren</b>: Very well.</p>
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